Beginner Guidelines for Investing in IPOs

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Beginner Guidelines for Investing in IPOs

5 Crucial Tips for Wisely Investing in IPOs


If you are looking to enter into the world of stock market, the first step is to open a Demat account or trading account. From there, the stock market offers a number of opportunities for investment. One such opportunity that attracts investors are IPOs. An IPO or Initial Public Offer is the first offer a company makes to the people to buy its shares. For a company, the primary aim of releasing an IPO is to raise funds and expand operations at a faster pace. Investing in an IPO is tricky and challenging for both beginners and seasoned investors. Before jumping into the ocean of the stock market, where stock prices go up and down, keep these 5 tips in mind that will help you invest funds correctly.

1 Research and Study the Company
IPOs are released by private companies, hence study everything about the company that you are planning to buy IPOs of. Keep in mind that private companies don’t have strict regulations, so there is a chance that they might hide important information from the public.
Search online about company’s history, past press releases, its competitors as well as position in the industry. Even though it may seem difficult to get good intel, learning as much as possible about the company is a critical step before making an investment.

2 Thoroughly Read Red Herring Prospectus
When you invest funds in an IPO, you want to become the company’s equity holder, and not debt investor. Before making your investment in the IPO, make sure you read the company’s prospectus in detail. It may be a dry read, but it will give you an adequate information about where the money raised through the IPO will be utilized.
You can find red herring prospectus about a company on its website, SEBI portal, stock exchange site or newspaper. It will help you learn about the company’s background, reasons for going public, its plan to use funds and what risks are involved.


3 Choose a Company with Big Brokers
IPOs are managed by brokers. Thus, try investing in IPOs of a company with strong brokers. While there is no definite rule that strong brokers don’t underwrite low-quality companies, but it usually doesn’t happen. Quality underwriters have their reputation to maintain, and hence, they are likely to underwrite IPOs of healthy companies.
Likewise, small brokers can be easily hired to underwrite poor IPOs as well. They may be inclined to underwrite any company they get. Therefore, make sure the company you are planning to invest is backed by strong brokers.

4 Wait Till the End of Lock-in Period
Lock-in period is the legally binding duration between the company insiders and the business underwriters during which the investors are not allowed to buy or sell their investments. This period lasts from three to 36 months, which begins from the date of allotment. The idea behind having a lock-in perod is to limit the fluctuations in the stock price.
Once the lock-in period is over, observe what underwriters are doing with the shares. If they start selling shares, it means the brokers are not confident about the company’s future prospects and the share prices will fall. If brokers hold the shares, this is a good indication of the company’s bright and sustainable future. Analyzing the profitability of stocks will keep you safe from any kind of risk.

5 Don’t Trust Brokers Blindly
Although IPO investments are considered safe, but it is far from reality. Due to lack of information available to public, investors rely on brokers’ advice for IPO investments. Brokers often approach high net worth people and lure them to invest in an IPO just for the sake of making a sale. Know that investing in an IPO doesn’t give guarantee returns. In case you lose, all your money will be lost, and not of the broker’s.
Therefore, take time to learn about the company and the nature of the business before investing. Keep the track of the company’s growth, its managers, promoters and everyone who is closely associated with the company. The broker may not give you in-depth details regarding this, so you need to find it out on your own.

The Bottom Line
Therefore, take time to learn about the company and the nature of the business before investing. Keep the track of the company’s growth, its managers, promoters and everyone who is closely associated with the company. The broker may not give you in-depth details regarding this, so you need to find it out on your own.

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