Top 10 IPO Investment Tips and Strategies
Investing in Initial Public Offerings (IPOs) can be highly beneficial. Many IPOs of companies have delivered stellar returns on the listing day as well as over the long term. However, not all public issues have managed to do well. In fact, there are quite a few instances where the performance of IPOs has been lacklustre. Therefore, you need to first identify the best IPOs to buy before investing in them. Here are 10 IPO tips and investment strategies that you can use to ensure that you make the right investment decision.
Do your own research
Whenever there’s an IPO, stock market experts review the issue and release research and advisory reports. The opinions expressed in such reports may be personal or biased, and may not truly represent the nature of the public issue. So, instead of relying only on such reports, it is always a good idea to conduct your own extensive research before coming to any conclusions. As part of your research process, remember to also compare the company with its competitors to get an overview of its performance.
Always read the prospectus
The Red Herring Prospectus (RHP) is a publicly available document that every company going for an IPO files with the Securities and Exchange Board of India (SEBI). You can gain access to this document from various sources, including the website of the company, SEBI’s website and even the websites of the stock exchanges. This document contains a wealth of information such as the company’s background, business, financial statements, strengths and risks, and details about the IPO. As an investor, you need to thoroughly read through the prospectus before investing.
Know where your funds are invested
Knowing what the company plans to do with the money it raises via the IPO can help you shape your IPO investment strategy. You can find such information listed in the Red Herring Prospectus. A company should ideally use the IPO proceeds to expand its business, purchase assets, or invest in research. On the other hand, if it plans to use the funds to repay its borrowings, you may have to reconsider investing in such an issue.
Probe the promoters and management
The promoters and the management are the lifelines of any company. The decisions that they take can materially influence the business and its performance. When evaluating an IPO investment, you must look into the promoters.
For instance, if the promoters are completely exiting the company, it may be a sign of financial distress. And while you’re at it, also pay attention to the management. A company must always be headed by experienced personnel and should have a low attrition rate.
Invest in IPOs backed by strong brokers
When evaluating an IPO, one key factor that you need to pay attention to is the stockbroker managing the issue. The larger and more reputed the stockbroker, the better it is, since they usually tend to only underwrite public issues that they have faith in. However, keep in mind that just because a public issue is backed by a strong broker, it doesn’t mean that it would always do well.
[Read more: How to Apply for IPO]
Invest at Cut-Off price
The cut-off price is the price at which the company allots the shares to the investors. In the case of book-built public issues, it’s always a good idea to bid at the cut-off price at the time of making an application. By following this simple IPO strategy, you can significantly increase the chances of getting shares allotted.
When planning an IPO investment strategy, always consider the valuation of the company. IPOs that have very high valuations usually don’t do very well over the long term. Some of the metrics that you can analyse to get an idea of the valuation are the Price to Earning (P/E) ratio, Price to Book (P/B) ratio and Price to Sales (P/S) ratio, among others. Compare these ratios with those of the company’s peers and the industry in general to get a fair idea of the IPO’s valuation.
Understand the lock-in period
This is one of the many underrated yet useful IPO tips that you need to know. According to SEBI’s rules, every public issue has a 6-month lock-in period starting from the date of listing of the shares on the exchanges. During this time, early investors including promoters, institutional investors and employees are disallowed from selling their stakes.
Usually, the share prices tend to go down on the day the lock-in period expires due to the activity of these early investors. Knowing when the IPO lock-in period ends enables you to plan your investment decisions in a much better manner.
Plan an exit strategy
As an investor, you should always have a comprehensive exit strategy before making an IPO investment. For instance, if you’re a short-term investor, you may choose to exit on the IPO lock-in expiry day. On the other hand, if you’re an ultra-short-term investor, you may choose to exit within the first few days of listing itself.
Initial Public Offerings can sometimes be highly volatile. Therefore, it is always a good idea to exercise caution when investing in one. So, always take IPO recommendations, whether it is from your friend or your stockbroker, with a pinch of salt.
Following the above-mentioned IPO tips should help you make an informed investment decision that’s in line with your financial goals. Remember to always conduct a thorough due diligence exercise before you decide whether to invest in a public issue or not. And if you do decide to go through with an IPO investment, make sure to first apply for a trading and demat account. Having a demat account is a mandatory requirement for investing in the Indian stock market. m.Stock offers zero brokerage for life across products - intraday, delivery, futures and options, mutual funds, currency and more. So open an account now!