Several major company IPOs or Initial Public Offerings have been listed in the Indian stock market in the past few years. Many other prominent firms have made their intentions known of listing themselves up next. IPOs have become a lucrative investment instrument as the stock indices are at an all-time high.
The performances of the IPOs listed in 2020 and 2021 are well enough that they are being traded at prices higher than the issue price. Some of these have gained as much as 400%. The general investment trend in these IPOs is that the investors are primarily young and retail investors.
Most IPOs perform quite well, and an online investing platform makes it hassle-free and simple. However, one should consider a few things before investing in an IPO.
- Researching the company
Before investing in an IPO, you must research the company thoroughly. The research must include its past performances and finances, whether there is a spike in rising revenues just before it is listed for the IPO, etc. A company can be labelled as a good performer if it has an average annual growth of 20% or more. A growth rate lesser than this makes it an underperformer. In that case, the investor should opt to invest in another company’s IPO. Also, information about a private company is scarce. Since the company mainly publishes it, the tendency to receive a biased report is higher.
The investor also needs to research the market performance of the industry with which the company is associated.
2. Reading the Prospectus
The DRHP, or the Draft Red Herring Prospectus, is filed by the company to the Securities and Exchange Board of India (SEBI), which outlines every company’s details. This includes its business performance, intentions regarding the capital accrued from the IPO, assets and liabilities, and possible risks affecting its performance and share prices. The prospectus also contains the bid range and the opening and closing dates of the IPO. Thus, it is pertinent for an investor to read the driving DRHP thoroughly.
3. The background of the promoter and the management team
The management team and the promoters play an essential part in any company. They drive the company’s growth. The track record of promoters in either destroying stock market wealth or poor corporate governance needs to be judged as they would eventually affect the company’s performance. An investor may suffer losses, even if the business is lucrative, due to a poor management structure pulling the company’s growth to the ground. Also, the idea of a company’s work culture can be derived from the average number of years spent by the top management officials. A company’s default on bank payments can also reflect the promoters’ decisions and performance. Thus, it is imperative to check their backgrounds and experiences before investing in the company’s IPO.
4. The purpose of the Proceeds
IPOs listed to raise capital for both debt repayment and expansion of the business are better for investment. The purpose of the capital raised entails a lot about the company’s performance. If a company raises proceeds to pay off debts, it is not wise to invest in such IPOs. Companies with rising profits, a reasonable cash balance, and list the IPO to raise funds to expand their business solely result in more or less guaranteed positive returns. Hence, they are a better investment option.
5. The lock-in period
The lock-in period for a company’s IPO can be anywhere between 3 months to 2 years. It is advisable to wait for it to get over before investing in the IPO. The stockbrokers and underwriters cannot sell the stocks in the lock-in period. If the insiders sell the stocks after the lock-in period, the company is not performing well. On the other hand, if the insiders continue to hold on to the stocks after the lock-in period, the company has a strong performance and wishes to grow its investments.
Online Investment App has made it feasible to make IPO investments. It is better to be sceptical and research thoroughly before investing in an IPO than to be trusting and ill-informed. The former will help minimise losses and maximise gains, while the latter will mostly lead to losses.