Many of us dream of earning money through investing in stocks. Some people prefer to invest in Mutual Funds or Trading, while others prefer to invest in IPOs. Initial Public Offering is the full form of IPO, and it’s the process by which a private company sells its shares for the first time in order to raise money. While it is not as easy as it sounds to make money from IPOs, with a good strategy and some helpful tips, one can reap some good rewards. IPOs come with unique risks, and this sets them apart from ordinary stocks already traded on the market. If you are thinking about investing in IPOs, here are six tips that you should consider before investing.
IPO Investing Tips and Tricks
Following are the tips that you should consider while investing in an IPO.
Tip 1: Do Your Research
IPOs are investments in private companies. There are no strict disclosure norms for private companies. This means that companies can often hide sensitive information from the general public. Even so-called ‘experts’ review IPOs based on publicly available information. Their research does not include an in-depth analysis of financials or internal workings of a company.
As far as the prospectus is concerned, it does give a good picture of the company and is also approved by the SEBI. Nevertheless, the red herring prospectus is written by the company itself, which may try to hide all negative information to maintain its good reputation. Therefore, conduct your research before investing in an IPO. Additionally, it is ideal to compare the company’s performance against its peers, overall sector analysis, and projections for future growth.
Tip 2: Read the Red Herring Prospectus
A smart IPO investor should pay attention to the red herring prospectus. You become an equity shareholder of the company when you invest in an IPO. To understand how your money will be invested, it is important for you to read the red herring prospectus thoroughly. Here is where you can get a copy of the red herring prospectus:
- Company’s website
- Stock Exchange website
- SEBI website
- Newspapers & Magazines.
You will learn the following from the red herring prospectus:
- Company background
- Promoter details
- The reasons for going public
- Company risks
- How the money will be used by the company, etc.
Tip 3: Know Where Your Money is Invested
A red herring prospectus only provides information on how your funds will be used. However, it is important to know this. When a company raises funds to repay its liabilities, it’s not a positive sign. It may be advantageous to invest in an IPO if a company is seeking capital for expansion and research.
Tip 4: Get to Know the Promoters and Management
Do a background check on the promoters and their experience before investing in an IPO. Also, observe the company’s management carefully. An organisation’s quality of management determines its growth potential. It is possible for a responsible management team to guide a company through temporary crises and create wealth for investors. Therefore, the most important tip for IPO investors is to look for companies with strong management.
Tip 5: Invest at Cutoff Price
In an IPO, you must bid within the price range specified by the company. You should bid at the cutoff price to ensure you get the allotment. In this way, your application will at least be considered, regardless of the final allotment price.
Tip 6: Plan an Exit Strategy
For short-term investors, this is an important IPO investing tip. The price at which you will sell your shares and book your profits should be determined. Good companies often list at high levels, and then drop over time. As a short-term investor, you should pre-determine your exit levels if you plan to exit in a few days (called flipping). Alternatively, you should also decide your loss limits, since not all IPO investments are successful. When investing in an IPO, it is important to set up a stop-loss and book profit.
For companies looking to raise equity capital, IPOs are an excellent option. However, not all companies raise capital for the right reasons. A company might raise funds simply to pay off its liabilities. This means you’re spending your hard-earned money on paying off someone’s debt. Therefore, it is critical to carefully examine hidden information regarding these companies before investing in their IPOs. It is also essential to have an unbiased broker like Kotak Securities who can research and recommend good IPOs. Apart from IPO research, Kotak Securities also provides the best trading app in India through which you can apply for IPOs without any hassle. You can invest in several IPOs, as the app facilitates investing in all the major IPOs launched in India.