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Will You Invest in an IPO of a Company with No History

29 Nov 2023

Irrespective of whether you are buying a laptop, a house, or investing in stocks, some prior research and understanding is essential. The more you know about a product or entity you are putting your money into, the more you can be at ease. You can also be more prudent and cautious and make calculated decisions about the financial concerns associated with a purchase.

When investing in an Initial Public Opening (IPO), it is advised to conduct thorough research about the company's history. In this article, you will find out why this is important.  

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Importance of assessing a company's history before investing in an IPO

An IPO, just like any other investment security, carries some risk. With no historical financial data or track record, the level of risk is further amplified. Without a history, you will have limited information to assess the company's performance, profitability, and potential risks. The lack of historical data will make it challenging to make well-informed decisions.

Here are some reasons why a company with no history can be a high-risk IPO proposition:

  1. The absence of historical financial data makes it difficult to gauge how the company has performed in the past and to assess its ability to generate profits consistently
  2. You may have limited visibility into the company's financial health without access to the company's revenue growth, profitability trends, and cash flow patterns
  3. Established companies often have a good reputation in the market, making it easier for investors to assess their credibility and trustworthiness. A company with no history may face challenges about its reputation and market standing
  4. Companies with no history may have a higher probability of failure compared to established businesses, as IPOs of such companies can be subject to higher market volatility
  5. If you do not have a clear understanding of the company's growth plans, you may not be able to connect with the company's principles. This can make it harder to be a part of a company's growth

A company's historical performance provides valuable insights into its long-term prospects. Steady growth and profitability over time indicate a well-managed and sustainable business. On the other hand, a lack of historical data may indicate uncertainty and unpredictability. Therefore, investing in an IPO without adequate history may not be advised.

Things to do when investing in an IPO

Now that you know what not to do, here is a list of things you should do to ensure a secure and informed investing experience:

Read the Red Herring Prospectus 

Reading the Red Herring Prospectus is a crucial step to consider when investing in a company's IPO. As SEBI guidelines mandate, every company going public must file a Draft Red Herring Prospectus (DRHP) with relevant information. This prospectus provides an overview of the company's foundation, details on how it plans to raise capital and insights into its business plan and operations. The prospectus also includes essential financial information, offering transparency into the company's financial health. 

Additionally, it discloses information about the company's promoters, helping you understand the key individuals behind the business. By carefully reviewing the Red Herring Prospectus, you can make informed decisions, assess the associated risks, and comprehensively understand the company before investing in its IPO.

Do a SWOT analysis 

Short for Strengths, Weaknesses, Objectives, and Threats, a SWOT analysis can help you understand a company's strengths and weaknesses. This can help you determine its position in the industry. It is advised to look at the company's strategies, past performance, future prospects, etc., and analyse its financial history.

Know why the company is raising funds

Companies go public in order to raise funds. These funds may be used for various purposes, such as expansion, funding research and development, advertising, debt management, etc. In some cases, companies may also issue an IPO to enhance their reputation and credibility in the market. There are several other reasons for companies going public. Understanding these can be important for you to figure out whether the IPO can positively or negatively impact the company.

To sum it up

While you may still invest in an IPO without a history, the stakes will be considerably high. Therefore, it is essential to be cautious and thoroughly research the company and its business model before making any investment decisions. This can offer you more confidence and trust in your investment choices.

Motilal Oswal offers a free Demat account to facilitate seamless investing in new IPOs. Apply today and start investing!


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