When to invest in an IPO?
Initial public offers (IPOs) are very popular among retail investors. But that doesn’t mean you bid for each and every IPO that comes in the market. There are a lot of factors you need to consider before investing in one. So, here are a few pointers to help you decide when to (or when not to) buy IPO stocks.
Go through the projected figures
The prospectus uploaded on Securities and Exchange Board of India (SEBI) website is a thick document filled with jargons. But that shouldn’t put you off. You can glean a lot of valuable information from this document.
Check if the company plans is raising capital to expand operations and enter new markets. Go through the projected financial figures in the document. It is important because many a times companies can over-promise and under-deliver.
Probable reason for going public
Look out for the company’s founders and initial shareholders. Check if the IPO is a reason for the initial investors to cash in and exit the company. This is another red flag because it simply means that original investors don’t have much faith in the growth of the company.
Beware when the markets are at record highs
When the market is performing well, investors are highly optimistic. Everyone wants to be a part of the growth cycle. Every new IPO sounds like it is the next best thing. Unfortunately, this is not true. The dot-com bubble in the late 1990s was a prime example of such optimism.
Tread carefully when the market is performing really well. Only seek out companies that have strong fundamentals and high growth potential in the future.
Utilisation of funds
If a company is not able to repay its loans without issuing stock, it basically indicates there is something wrong with the company’s internal operations. Give such companies a short shrift.
When you are planning to invest in an IPO, you shouldn’t view the stock in isolation. It is always better to understand the performance of the sector to get a better understanding.
For instance, imagine the company belongs to the IT sector. You should analyse the performance of stocks of similar market capitalisation. How are stocks performing? What is their future potential? What are the threats and opportunities?
The answers to these questions can help you get a better understanding of the competition and future growth prospects.
To sum up
It is alright if you did not get allotted any shares in a major IPO in the past. There is no lack of IPOs coming your way. In fact, you are probably going to have too many options to choose from. And when the time comes, don’t simply jump on the IPO bus. Choose your investments wisely.