Big Tech and Recent IPOs

6 Factors To Check Before You Invest In IPO

Shriya Sarang

31st May'22
6 Factors To Check Before You Invest In IPO | OpenGrowth

Investing and buying new stocks are very complicated if we want to do them right. Whenever we are buying a new stock, we often check out the performance of that particular company and the returns it has given in the past 1, 3, and 5 years. Similarly, we check the background of the company and then decide whether to buy it or not. But when it comes to buying an IPO, we aren't provided with the information on its performance as it is a pre-launched product. IPO buying solely depends on the company’s reputation and past sales records. Let's check 6 factors that you need to check before you buy any IPO -


What is an IPO?


When two people decide to start a business, they do so with their own money. When a company expands, it needs additional money from the outside in the form of equity or borrowing money from others. When investors participate in an initial public offering (IPO), they become shareholders in the company and help it develop.

As a result, the corporation must list or become a public limited company to raise cash from the general public. Thus, an Initial Public Offering (IPO) is the process through which a private firm becomes a public limited corporation by selling its stock to the general public for investment.


6 Things To Check Before You Buy An IPO



1. DRHP 


Every firm that wants to go public in India must file a draught red herring prospectus with the Securities and Exchange Board of India (SEBI). This document is the most reliable source of financial data on the company. Take a look at the current stock distribution. A higher percentage of shares held by institutional investors and banks could be a good sign, reflecting their trust in the business. You should also learn everything you can about the management team's experience and qualifications.


2. Investment Horizon


Do you intend to engage in the IPO to make a rapid profit on the first day of trading, or do you intend to hold the shares for a longer length of time?

Your IPO approach will change as a result of this. A short-term strategy is based on current market sentiments, whereas a long-term strategy forces you to analyze the company's fundamentals.


3. The Promoters


Another important consideration is the entity that is advertising the IPO. A firm or an individual could be a key promoter. Names that are well-known lend legitimacy to the issue and, as a result, command a higher price. When a company is government-owned or promoted by someone with close ties to the government, its value skyrockets.


4. Objective of the company


What is the company's mission statement? What will be done with the funds? Look for answers to these questions to help you determine how long it will take for your investment to pay off. This will also suggest the company's future path.


5. Grading of the IPO


An IPO's grading is also a significant element. The higher the grading, the better the odds of a successful IPO. However, there is no set formula for this. In the past, companies with high grades had to cancel their first public offerings. While grading is an excellent signal, it is not the only one. Other considerations should be considered as well.


6. Your Understanding Of Their Business


As a general guideline, avoid investing in a company that you are unfamiliar with. This is a crucial factor. Warren Buffett, the legendary investor, often preaches, "Invest inside your zone of competence." This is because having a full understanding of a company will assist you in making more informed judgments. It is always preferable to conduct your homework rather than rely on hearsay.

Do you believe you have set financial goals, devised an investing strategy, and conducted sufficient research before applying for an IPO? If you answered yes to any of the questions, now is a wonderful time to learn how to apply for an IPO.


How to analyze an IPO?


Because an IPO is a combination of a new issue and an offer for sale, investors should be aware of the proportion of the offer for sale to the new issue.

The promoters are selling their interest if the proportion of Offer for Sale (OFS) is more than the Fresh Issue, which is not a positive indicator for the company.

If the proportion of Offers for Sale (OFS) is smaller than the new issue, it means the company has good growth potential and the promoters believe in the business plan. Check out these 5 IPOs to watch out for this year.


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Shriya Sarang holds a degree in Political Science and Public Administration. Apart from having no political opinions, she advocates financial literacy among her friends.