Things To Know Before Buying An IPO

When a new IPO (Initial Public Offering) hits the market, the excitement is often contagious. You see big advertisements, your friends are talking about Listing Gains, and social media is full of screenshots of people's profits. It feels like a golden opportunity to double your money in a week. However, just like you wouldn't buy a house just because it has a fresh coat of paint, you shouldn't buy an IPO just because it has a lot of hype.

In 2026, the Indian stock market has become very efficient, but it has also become more complex. For every Superstar IPO that doubles your money, there are others that list at a loss (discount) and stay there for years. To be a smart investor, you need to look beyond the noise and check the engine of the company. Here is a simple, non-financial person's guide to the 7 things you must know before you hit that Apply button.

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Why Behind the IPO (Objects of the Issue)

The first question you should ask is: Why does this company want my money? You can find this in the Objects of the Issue section of the prospectus.

• Good Signs: The company is raising money to build new factories, expand into new countries, or invest in new technology. This means your money is being used for growth.
• Red Flags: The company is raising money mainly to pay off old debts or if the original owners (promoters) are selling most of their shares and running away with the cash. This is called an Offer for Sale (OFS). While not always bad, it means the money isn't actually going into the business.

Read the Risk Factors (The Honest Truth)

Every company is forced by SEBI to list its Risk Factors in the official Red Herring Prospectus (RHP). This is the part of the document where the company admits its weaknesses.

• Pay attention to things like pending court cases, high dependence on just one or two big customers, or any government licenses that might expire soon. If the risks sound too scary, it might be better to stay away.

Management Quality (The Drivers)

A great car is useless if the driver doesn't know how to steer. Look at the people leading the company, the CEO and the Founders.

• What to check? Do they have a clean record? Have they been in this business for a long time? A stable management team that has seen both good and bad times is a huge plus point.

Check the Price (Is it Fair?)

Just because a share is priced at ₹100 doesn't mean it's cheap. You need to compare it with other similar companies that are already listed on the stock exchange.

• P/E Ratio: This is a simple tool to see if the company is expensive. If the industry average P/E is 20, but the IPO is asking for a P/E of 50, you are paying a very high price. Ensure the valuation leaves something on the table for you to make a profit.

Look at the Financial Health

You don't need to be an accountant, but you should check the last 3 years of performance.

• Consistency: Is the revenue (total sales) growing every year? Is the profit increasing? Avoid companies that suddenly show a huge profit just 6 months before the IPO. It might be window dressing to look good for investors.

Comparison: Successful IPO vs. Risky IPO

Feature

Signs of a Strong IPO

Signs of a Risky IPO

Utilization of Funds

Future expansion and growth.

Repaying old high-interest debt.

Financials

Consistent profit growth for 3 years.

Loss-making or sudden profit spikes.

Promoter Stake

Owners keep a large shareholding.

The owners are selling almost everything.

Peers

Priced lower or equal to competitors.

Much more expensive than competitors.

The Anchor Interest

In 2026, one day before the IPO opens for you, big professional investors like Mutual Funds and Foreign Banks (called Anchor Investors) get to buy shares.

• The Logic: If big, smart institutions are putting hundreds of crores into the company, it gives you a safety signal. If the anchor portion remains undersubscribed, it’s a warning sign.

Beware of the Grey Market Hype

The GMP (Grey Market Premium) is the unofficial price people are betting on before the listing.

• Caution: Many people apply for IPOs solely because the GMP is high. Remember, the Grey Market is unregulated and can be manipulated. Use GMP only as a mood indicator, never as your only reason to invest.