What do you need to know about IPO before investing?

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An Initial Public Offering (IPO) refers to a process where the shares of a private limited company are sold to the public for the first time. In general terms, the issue of shares to the public allows the company to raise capital from public investors. It is a process through which a private company becomes public.

To launch an IPO, companies must adhere to various rules, regulations, and standards, as well as meet the requirements of stock exchanges, depository participants, and the Securities and Exchange Board of India (SEBI).

According to a report from EY, it says that “Indian stock exchanges (BSE and NSE including SMEs) ranked ninth in the world in terms of the number of IPOs in year-to-date (YTD) 2021.”

The market is seeing a bullish trend and hence various unlisted companies are trying to take advantage by unlocking the potential and lining up their IPOs.

Calendar 2021 is surely going to be a record year with some of the top IPOs that have already made their market debut or are in the pipeline, all ready to make some noise and create investor frenzy. Paytm, Nykaa, Nazara Technologies, Zomato, Bajaj Energy and LIC are some of the top names of the IPOs in the IPO league of 2021.

However, an investor needs to understand the market trends and the stock markets’ metrics before applying for various offers. Here are some points which investors must consider and keep in mind while applying for IPOs: -

  1. Read the Prospectus of the company carefully

Investors must diligently refer to the Draft Red Herring Prospectus (DRHP) of the company, filed with SEBI to understand why the company intends to go public, how the company intends to utilize the proceeds of the IPO, the risks associated with the investment, the financial ratios of the company and other primary aspects. 

  1. Know the Promoters, Board of Directors, and the management of the company

It is vital to understand the background of the company's promoters. Promoters are those who promote and are accountable for the company's existence. It is indeed crucial to know the company's directors, company secretary, chartered accountants, senior management, and overall investment. 

  1. Understand the business of the company, its peers, and competitors

Understanding the company and its parameters is just as crucial as comparing peer groups. The company's DRHP also includes information on its peer group companies and competitors, allowing investors to keep track of the company's valuation and financial numbers. This information is also available on the internet for investors. 

  1. Understand how the company will be using its IPO proceeds

Before investing, think about how the company plans to use its IPO profits, as well as where the cash will be held and invested. For example, if the company states that it wants to use the funds for expansion, this is a good indicator for investors because they will gain from the expansion in the long run. 

  1. Analyze the business strategy of the company

An investor should carefully examine how the company intends to do business and research the company's position in the industry in which it operates. All of these details are mentioned in the DRHP, so an investor may quickly learn about the company's potential. 

  1. Consider the risk factors associated with the investment

It is important to ascertain if there are any high risks that the company is associated with, owing to their assets, liabilities, and other valuations. The Risk factor is a major factor to be considered as it can pose a threat to the company’s future prospects. 

  1. Analyze the prime financial parameters of the company

Understanding financial health is of prime importance. Investors must analyze the company’s financial health before applying for its IPO. Various financial ratios like Return on Equity (ROE), Earnings per share (EPS), Price to Book (P/B), Price to Earnings (P/E), Book Value, Dividend Yield, and Dividend Payout Ratio among the others must be studied before investing in any company. 

During the IPO, primary markets provide a tremendous chance for investors to buy shares in the company and contribute to its shareholder equity. Individual research, market timing, and a detailed examination of market patterns, on the other hand, can help investors go a long way. 

There is a high momentum witnessed in the Indian capital markets and many companies are exploring listing opportunities both in the country and overseas. 

Open an account with mastertrust now and apply for the best IPOs which are to be listed like Nyka, LIC, Paytm etc. mastertrust can also assist with many aspects of how to open a trading account and how to invest in an initial public offering. Contact us, today!