In the 1990s dotcom mania, initial public offerings IPO, the first time the stock of a private firm is sold to the public, got a little
out of hand. At the time, investors could invest in practically any IPO and were almost guaranteed to make a killing—at least
initially. Those who had the intelligence to enter and exit these businesses gave the appearance that investing was simple.
The tech bubble eventually burst, and the IPO market went back to normal. In other words, investors could no longer anticipate
making double- and triple-digit gains from stock flipping as they did during the early tech IPO era.
Today, there is profit to be earned in IPOs once more, but the emphasis has changed. Investors are more likely to thoroughly
examine a stock’s long-term potential rather than seeking to profit on its immediate rebound.
IPOs are risky investments for a number of reasons. First of all, there is no assurance that the company you invest in will be
profitable in the long run, just like with most investments.
Second, there is frequently a lot of hype around IPOs, which can result in exaggerated hopes for the future success of the
company. Due to this, shares may be purchased by investors at inflated prices, only for the stock value to decline shortly after the
Finally, IPOs are subject to intense regulatory scrutiny, which may cause delays or even cancellation. This implies that the
postponement or cancellation of an IPO is always a possibility.
Given a large number of IPOs planned for the upcoming months, it is crucial for investors to understand what to look for before
investing in an IPO.
The Red Herring Prospectus should be read:
When a business plans to raise capital by offering its shares to the general public, it files the Draft Red Herring Prospectus
with SEBI. This document outlines the company’s intended use for the funds that will be raised from the general public as well as any potential risks for investors. Thus, before investing in any IPO, investors must carefully read this document.
Motives driving the Fundraising:
It should be noted that it is essential to look into how the company plans to use the money received from the Initial Public Offering. Check to see if the company intends to pay off its debt or if it intends to raise money to partially pay off debt and grow the business or to use the money for corporate reasons. This demonstrates that the money will be used wisely in the company, which is encouraging for an investor.
Understanding the Business Model:
Before participating in the Initial Public Offering, investors should be aware of the company’s business model. The following stage is to identify the new potential in the market after they are aware of the type of business the company is engaged in. This is because the size of the opportunity and the company’s ability to gain market share can have a significant impact on both the company’s growth and shareholder returns. Investors should avoid the company’s initial public offering (IPO) if they don’t understand the company’s business operations.
Examining the Management and Promoter Background:
Knowing who is operating the business is crucial since they form its foundation. Investors should consider the promoters as well as the company’s management because they are crucial to all of the company’s operations and functions. The company’s management is crucial to the success of the enterprise. In order to get a sense of the working culture of a company, one should look into the credentials and length of service of the senior management.
Company Strengths and Weaknesses:
Before making an investment in a company’s initial public offering, one should perform a SWOT analysis. The DRHP can be used to examine the company’s main strengths and weaknesses. Investors should research the company’s standing in the industry it serves. In order for investors to analyze the business’s future possibilities, one should attempt to read about the company from a variety of sources as well as regarding strategies.
Valuation of the Company:
Investors should also examine the company’s values because the offer price can be too high or too low based on the industries in which the company operates and its financial statistics.
Condition of the Business:
For the purpose of determining whether the company’s revenue or profit is increasing regularly or not, it is crucial to review the financial performance of the business over the previous several years. Purchasing shares in an initial public offering may be a wise investment if revenues are rising. Before making an investment in the company’s IPO, investors must be aware of its financial situation.
Investors should have a defined investment horizon prior to participating in the company’s IPO. They should choose whether they want to hang onto the shares for a longer period of time or only trade them on a listing day if they intend to invest in the IPO. This is because a trading strategy would be based on the state of the market at the time, while a long-term plan would be based on the company’s fundamentals.
Investors ought to research the competitors of the company. The DRHP includes peer comparisons based on valuations and financial metrics. Investors can examine comparative valuations to determine whether the company’s valuations are reasonable compared to those of its competitors.
Potential of the Company in the Market:
Investors should also investigate the potential of the business, including any possibilities and risks, in the industries in which it operates. Comparative valuation compares the company’s value to that of other similar companies in the industry, whereas valuation refers to the IPO price in relation to the company’s financial situation. You must invest in a firm if both its value and its comparable valuation are positive. On the other hand, if a corporation is losing money while charging outrageous prices, your brain should start to raise red flags.
It takes extensive research to purchase IPO equities, and doing so can be dangerous. IPOs may not be a sure thing, even for
those who are fortunate to get in on the first-day flurry. Therefore, the majority of individual investors should carefully research
new firms, and it’s a good idea to keep your position in any given company to a few percent of your total assets.
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