Ever so often companies require working capital to expand their business and diversify their product suite and IPO or initial public offering is a way to raise this capital from investors. By the sale of shares or equities, the capital raised is then utilized in business expansion, reducing or eliminating debts and facilitating easy trading of existing holdings amongst others. The investors, in turn, become a part of the business, benefiting as the business grows and share price increases. Investing in an IPO can certainly prove rewarding however there are certain things investors must be wary of. Here are a few things that investors should keep in mind before investing in an IPO in 2020.
It is important to be familiar with your risk profile and the reasons behind investing before you take the plunge. When a company goes public, there is a lot of publicity and hype around the same, which often leads to investors rushing to subscribe. Many investors cite reasons such as peer recommendation or simply the fear of missing out on the opportunity to buy low as the reasons to subscribe. However, as an investor, you must go deeper than these reasons. If you have been closely following the sector to which the business belongs to, the growth trajectory of the business itself and are convinced of its potential based on fundamental analysis, should you consider investing in the IPO.
When it comes to stock investing, the ability to conduct deep research about the business you are looking to invest in, no matter how arduous it may seem, is the right approach. Download the company prospectus from its official website or even from the SEBI website and thoroughly read it. Take help if you aren’t able to understand certain terminologies but don’t skip over sections. The prospectus contains information about the company’s financial performance, the reason behind issuing an IPO, the details about the promoters, dividend policy, offer information, details about the management, regulatory and statutory disclosures etc.
Consequently, the prospectus is a good starting point for your research. To further complement your research, go through the media reports about the company and follow any recent developments regarding the same. See if there has been cases of defaults in corporate governance, any legal disputes the company might have landed in, ongoing compliance issues, hasty managerial exits, etc to further gauge how strong the company is fundamentally. Only and only when you are fully satisfied on all fronts, should you proceed further. Please note, this may seem like a time-consuming effort, however, do not bypass this step. You may discover some weak spots that can help you decide whether this is a suitable investment opportunity for you or not.
It is highly important that you check how the proceeds raised from the IPO will be used. If company says only debt will be repaid , then it is not such an attractive option , but if company says they will partly pay debt , open a new factory or general corporate purpose , then it shows that money will actually flow in the business which is good for an investor.
This may seem tricky for retail investors but is an important aspect that shouldn’t be overlooked. To begin with, see how the valuation of the company fares as compared to existing companies in the same industry. You can employ techniques like Price to earnings ratio, price to book ratio and return on equity judge better.
Its very common for investors to base their bets in an IPO based on the esteemed list of promoters, major stockbrokers backing it. However, their reasons could be based on different calculations and this doesn’t translate to guaranteed returns. You should base your decisions only on your research and analysis of the company fundamentals and growth prospects before taking a call.
To conclude, the decision to go for an IPO must be based on your investment objectives, how much risk you are willing to take, and whether you believe in the growth potential of the business. Don’t make decisions based on the publicity and hype surrounding an IPO neither on peer pressure or recommendations. Be skeptical and take informed decisions, afterall, if you have selected an IPO on the fundamental premise, the business will do well irrespective of market trends and reward investors who remain invested for the long run.
Disclaimer: The views expressed in this post are that of the author and not those of Groww.