Purchasing newly issued stocks (IPOs) is an excellent option for investing in the Indian stock market. When businesses go public, they sell the stocks for the first time to the general public as well as investors. It makes ways for a person to become a part owner of possibly lucrative enterprises. However, just like almost everything in life, IPO investment is not completely without their drawbacks. Let’s delve on five important things which you ought to know before you start investing in an IPO.
1. Explaining the IPO Fundamentals
The process of going public is very important to a company through offering shares through the securities market through an IPO. It is the method by which a private firm lists its stock for sale for the first time to the public. This transition helps the company to mobilize funds from all classes of investors thereby expanding its horizon and growth agenda. IPOs offer investors a chance to invest within a company right from the time it goes public hoping to gain as the company flourishes over the next few years.
2. Need for Research and Analysis
One must first conduct research before diving into an IPO investment. This entails the analysis of documents known as the company’s prospectus that contains all details about the firm’s strategy, financial standing and profile together with identified risks and anticipated future outcomes. Some of the key points of consideration include the firm’s trends in sales revenue, returns on investments, general market status and the position of the firm in the market and the prevailing market forces at the time. Furthermore, it is important to evaluate management experience, and achieve a record in showing performance. Never forget that each of the best stock market investment decisions is made with perfect knowledge of all the facts and figures in the equation.
3. Evaluating the IPO Pricing
The price at which an IPO is set, is a key consideration that can determine the success of your investment. Business and the underwriters work hard to find a price which is acceptable to the business and its investors while ensuring they get the maximum amount of capital. Still this price may not always be a correct reflection of the actual value of the company. The IPO price should be compared with peers in the specific industry; some work with the price as perceived in terms of P/E ratio and growth. Watch out for hype around IPOs which have set up very high prices because the price may not have much room to grow.
4. Knowing What You Are Up Against
Although IPOs can be enticing, they are not without their own set of vagaries alongside the many opportunities they present. New listings companies have no operational history as a listed company hence their future performance cannot be easily foreseen. Market swings affect IPO stocks most especially during the initial trading days of the stocks that are being offered. Furthermore, they tend to have little disclosure to the public compared to big floating companies on the market. In any case it is important to emphasize that not all IPOs can and will be successful and they may fail to meet their projections.
5. Lock-in Period and Long-term Strategy
In regard to IPO investments the readers need to be conversant with the meaning of lock-in period. In India for instance, control shareholders are barred by law from selling their equities within a prescribed period from the time of listing. This period can influence the continuation of the stock price movement after listing with the market. As an investor, one may always benefit from taking the long view on the market. First, a lot of IPOs get listed with an anticipation to generate fast profits as soon as possible, however many of them take years to deliver their potential. Investing on the IPOs requires a lot of patience and emphasis on the fundamentals of the company in which one is investing.
Conclusion
When it comes to IPOs as an investment opportunity in the Indian share market, it can be quite an enthralling experience potentially yielding excellent returns. But it must be balanced, which means that it should be approached properly, having done necessary research. Investors should understand “how to apply for IPO” if they need to be empowered with basics, risk assessment procedures, measurement and staying power with a long-term view to triumph in the world of IPO investment.