IPO Investment Strategy, Smart Tips for Investing in an Upcoming IPO

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Initial Public Offering or IPO refers to the first time when the stock of a private company is sold to the public. After an IPO, the company’s shares are listed on the stock exchange/s and are available for trading. The main purpose of an IPO is to raise money. Companies who wish to expand their business, repay loans, fund general corporate purposes etc. raise funds by selling a portion of its equity stakes to the investors.

Through IPO, the liquidity of the stocks increases as they get listed and are available for trading. Moreover, by going public, the credibility and brand value of the company increases and it is a matter of pride for the company.

Many of us dream about earning money or even creating wealth by making IPO investment but it must be understood that gaining money from stock markets by making IPO investments is not as easy as it sounds. There have been times when various companies have performed well on the first day of their IPO but they have not created much wealth for the investors in the long run.

However, with a planned strategy and smart tips for investing in upcoming IPOs, one can be assured of generating high returns. In this article, we will discuss some useful and smart tips for investing in upcoming IPOs to create more money for you.

1.   Get Obsessed with Research

One must remember that when they are investing in an IPO, they are investing in a private company and they do not have strict disclosure norms. Thus, there are high chances that a lot of information does not come out to the general public. It is wise to carry out immense research on the company, its promoters, management, goodwill, reputation, product range and various other aspects of the company.

One must get obsessed with research and compare the company’s performance with its peers, observe its growth prospects, study the overall sector analysis and read the draft red herring prospectus carefully before making an IPO investment.

2.   Get an Idea of where your Funds are Invested

A draft red herring prospectus filed by the company with SEBI gives you detailed information about how your funds are utilized. This will give you a fair idea of whether you should invest in the IPO or not. For e.g. if the company is raising funds to repay its loans and other liabilities, it may not be a positive sign but if a company is raising capital for research and expansion, it is a positive sign and you may invest in the IPO as the future projections of the company may look bright.

3.   Pay attention to Company’s Promoters and Management

Before you invest in an IPO, do a thorough background check on the promoters and their experience with the company. Often IPOs act as an exit-window for promoters. Thus, it is highly essential to know the quality of management and one must always invest in companies with strong management. A responsible team of promoters and management can manage a company well and create wealth for investors in the long term.

4.   Invest at Cut-Off Price

If you are a retail investor and you wish to increase the chance of getting shares allotted, then you must bid at cut-off price. In this way, your application will be considered, irrespective of the final allotment price.

5.   Take a look at the Valuation

Before you invest in an IPO, compare the valuation of the IPO with a listed peer. Valuation is extremely technical and requires skills and knowledge. Investment bankers and underwriters judge the quality of management and returns before arriving at the final offer price. Thus, you should also set up valuation benchmarks to judge the company against its peers.

6.   Plan an Exit Strategy

As an investor (especially short-term investors), it is important for you to decide at which levels you will sell your shares and book profits. Thus, as an investor you should pre-decide your exit levels. Alternatively, you can also decide your loss levels as all IPO investments may not work in your favor. Thus, set up a stop-loss and ensure that you book profits so that the main motive of your IPO investment is attained.

7.   Understand the Lock-in Period

This is an important part of your IPO investment strategy, especially for retail investors. Underwriters and insiders have a legal contract for holding shares. If the underwriter starts selling shares after the lock-in period, the share price will fall. It signifies that the brokers are not confident of the company’s future projections.

Similarly, if the underwriters hold shares even after the lock-in period, it is a good indication as it shows trust and confidence in the company’s future prospects.

IPOs are a great method for companies to raise equity capital. At the same time, they offer a great opportunity to investors to generate and create wealth for themselves. However, it is important to carefully note the hidden information of the companies before investing in IPOs.

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