Many investors prefer investing in the stock market via the IPO route. However, it is not always easy to make profits through an IPO. If you invest in an IPO, you must have a strategy to help you generate returns from your investments. In this article, we will discuss some Tips for Investing in an IPO.
5 Tips for Investing in IPO
1. Checking the Company’s Performance
Before investing in a company’s IPO, it is vital to check the past performance year on year. Also, you must check if there is a sudden increase in revenues before the IPO launch. If the company’s revenue is growing consistently, it indicates that the firm is growing well. Furthermore, you must check the company’s performance with its peers in the same industry. If the company is underperforming, you must evaluate other factors or look for better companies to invest in.
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2. Select a Company with Strong Brokers
As an investor, you must understand that strong brokers will help to bring quality companies to the public. There are good quality brokers that are associated with quality investors. But these brokers may not permit your investment first through IPO. Typically, they reserve it for high net worth individuals (HNIs).
On the other hand, you must be cautious while selecting a company with small brokerages. However, one advantage of small brokers is that they come with a small client base. This makes it easy for individual investors to invest in pre-IPO shares. Eventually, doing your own research before investing is important.
3. Doing the Background Check for Promoters
This is one of the essential points to check before investing in an IPO. You must check the promoter’s background and the experience they have. Also, this helps to study if the company has any history of default payments to any banks. Usually, the promoter’s performance will have an impact on such default payments. This information about the company and its promoter is available online.
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4. Reading the Company’s IPO Prospectus
You must never skip reading the company’s IPO prospectus. Read thoroughly but never put complete faith in it. The prospectus gives an insight into the risks and opportunities the company has to offer. Also, it mentions how the company will utilise the money it will raise through IPO. For instance, companies that raise funds for paying loans or buying equity are not a good sign. While companies using funds for market research, expansion, etc., can be a good investment opportunity.
5. Wait for the Lock-in Period
The lock-in period is the duration where the underwriters or stockbrokers cannot sell their shares. This period ranges from three months to two years. If the brokers or underwriters are holding the shares even after the lock-in period, it depicts that the company is going strong and continues to grow its investments.
Who Should Invest in an IPO?
Every investor looks for investment opportunities when markets are reaching new highs. Whether gold, real estate or the stock market, investors want to enter the market, expecting it to rise further. Thus, investors are willing to put their money which resembles a lucrative opportunity.
Investors looking for early access to a company with high growth potential can consider investing through IPO. It can fetch profits in the short term and grow investors’ funds in the long term. Also, IPO is a transparent process where it discloses all the information about the company. However, investors must have experience and knowledge of how the stock market works. More importantly, they should be informed about what’s going on in the country and the economy. Furthermore, investors must make smart decisions about selling the company stocks to realise its growth potential.
Investors need to understand that the stock market can be volatile and lead to substantial swings in the short term. Having the right pick for the investment portfolio and staying invested for the long term can help create wealth from potential companies.
IPO investments can be good decisions if you are well informed about the market conditions. Sometimes IPOs can make history, making many people regret who missed the opportunity. A smart investor always keeps track of the upcoming IPO list and continues to add valuable shares to their portfolio. This can be an added advantage to the portfolio. However, you must remember that no investment comes without risk. Therefore, it is crucial to do proper homework and conduct due diligence. Also, you can consider some tips for investing in IPO with Scripbox.
Warren Buffet says, ‘Price is what you pay. Value is what you get!’