Checklist Before Investing in an IPO
Initial Public Offerings (IPO) are the latest buzzword, especially among investors in the stock market. So what is an IPO, and why is it in demand?
An IPO is the process of a company or firm issuing its stocks to the public in a new stock issuance.
Since these stocks will start trading only after the IPO, a block of stocks bought through an IPO has a high return potential over time. This is why IPOs are in demand currently.
However, it is not without risks. Before you invest in an IPO through a stockbroker, you need to do thorough research and analyse the company’s finances over time.
To help you avoid common mistakes, we’ll take you through a checklist that will help you make an informed choice when it comes to IPOs.
What to check before investing in an IPO?
Investment Goals and Horizon
Before investing in an IPO, the investor must have the answer to these two questions:
What is my investment goal? How long am I planning to hold the shares?
A clear idea of these two questions will go a long way in helping you come to the right decision.
A short-term strategy could be made based on current market trends, whereas a long-term plan requires the investor to deep dive into the company’s financials and valuation.
Do note that returns must always exceed the price paid for the growth of the company.
Identifying the right IPO
Go through the following steps to make sure you identify the right IPO.
1) Every company that wants to go public has to file a draft red herring prospectus with the Securities and Exchange Board of India. This document would be your go-to source of financial information about the company.
2) Check the credibility of the promoter of the IPO. When the company is government-owned or promoted by someone close to the government, the valuation of the company is appreciated.
3) Higher the grading of the IPO, the higher the chances of it being a success. Having said that, this isn’t the only criterion that decides if a particular IPO is a good investment or not.
4) Understand the business and its objectives. How the company uses its funds will help you understand if it meets your financial goals or not.
Eligibility to apply for an IPO
Before applying for an IPO, you must ensure you meet the eligibility criteria for the same.
- You must be a SEBI-approved investor, i.e. a Retail Individual Investor, a Qualified Institutional Buyer (QIB), Non-Institutional Buyer (NII), or an Employee.
- An Online Demat account is a must for investing in IPOs. Trading accounts must be open before applying for an initial public offering (IPO) online. You can open a trading account with any SEBI certified Depository Participant.
- You should have: a savings/current bank account linked to your Online Demat Account, Permanent Account Number (PAN), and enough money in your bank account to fund your application.
Always keep track of the latest news of the company
Always check for any news related to the firm whose IPO you are interested in. Create an alert for any news around the company and monitor if the news is positive or negative.
You need to do thorough homework to understand the risks before applying for an IPO. Remember, it’s always better to be cynical than trust the market blindly.