Things You Should Know About Initial Public Offer (IPO) Before Investing

Initial Public Offer popularly known as IPO is a process in which a company raises money by selling their shares to the public for the first time for growth and expansion. Investing in IPOs is very popular because it gives us the opportunity to earn quick money. And also if you are a long-term investor then you have been provided with the opportunity to buy some good companies shares at a cheap rate. If you are allotted shares in an IPO, you can then sell your stock in the secondary market. Secondary market means you can sell your shares on NSE or BSE (stock exchanges). Listing gains depend on demand and supply of that company shares. If the demand for a company’s shares very high then you will get high gain upon listing on the secondary market. But if the company’s shares are not in demand then it may be listed at a discount rate and you could suffer a loss.

Before investing in IPOs you must be very careful while selecting companies to invest in an IPO. 

Why should you invest in IPO?

You will get many benefits if you choose to invest in IPOs. Firstly, the companies normally offer discount price on the fair value when they are offering shares to the public for the first time. So that means as a retail client when you are buying IPOs, you are getting shares at a cheaper price. Secondly, there are many growing companies here in India, but they are still new to entering the stock market. So buying those companies’ shares in IPOs means you are associating with them from the beginning. Thirdly, it can be a gateway for you if you want to enter the stock market. You can get high return without taking too much risk. Also, not much of expertise is required for investing in IPOs, unlike stocks.

How to invest in an IPO?

If you have trading and Demat Account with any Stock Broker, that’s it now you can invest in an IPO. Research the company issuing IPOs before investing your money. Try to choose the best from the lot and check the issuing and closing date and pricing details of the IPO you want to invest. Your next step will be applying on the IPO. You cannot apply for any number of shares for an IPO like you can do with shares; you should be investing as per lot sizes according to the company specification. You may not be allocated all the stocks that you offer to buy. You may or may not be allocated a "pro rata" portion of the number of shares you have been offered to buy. Just try to request the maximum number of shares you would like to purchase assuming they are available. 

The main reasons behind companies go public:

• To Raise Fund:  The companies often offer IPO to the public to raise money. They generally use this raised fund for capital expenditure, working capital, research & development, and acquisitions and hoping for the company to grow and make more and more money for their shareholders.

• To build a reputation: Building reputation is very important for a company to sustain in the modern days.  Going public on reputable stock exchanges such as NSE or BSE Builds Company’s reputation because the company is now subject to the scrutiny of the SEBI (Securities and Exchange Board of India). As we all know the key to success is building a reputation. With better reputation, a company can attract higher talented employees, do business easier, and continue to raise money or cash out existing shareholders due to higher levels of trust.

• Marketing:  IPO is a great way for increasing prestige, new investors, and business partners.

You must know what you are investing in:

Any investors thinking of investing in IPOs need to do their homework first. This does not mean only checking the fundamentals of the company you are interested to invest but you should also know why the company is issuing IPO. Is the business plan of the company realistic? Is there any demand for the IPO issuing company’s products and services? The company belongs to which sector? Does the sector will perform well in the future? You can take advice from your financial advisor as well to gather the information related to the company.

Always check out the supporting cast of the IPO before Investing:

You have to understand the supporting cast of the IPO, without knowing it, you cannot judge the real value of an IPO. Firstly, you need to look at the promoter’s stake in the company post IPO. If the company is reducing the stake significantly, in that case, you won’t feel comfortable. Also, check out the pedigree of the bankers who invested and the book running lead managers.

There is continuously a lot of performance pressures associated with a public listed company, simply due to the fact that much info is made public within a very short period of time for the investors to guarantee timely decision making.