IPO Investment Tips- Strategies for Investing in IPO

IPO is short for Initial Public Offering. It is done when a private company sells the shares of the company to the public in order to raise money for the first time. Additionally, after an IPO is conducted the shares of the company get listed on the stock exchange where those are available for trading. An IPO or Initial Public offering is often referred to as “Going Public” and the process of underwriting is led by an investment bank. Moreover, there are various reasons for a company to go for an IPO, some of those are stated below.

Companies that are looking for growth prospects often go for IPO in the hope to raise capital. The most beneficial reason for an IPO is the additional capital that is raised. The capital that is raised via an IPO is used to purchase PPE (that is Property, Plant, and Equipment) and for R&D purposes (Research and development). There is awareness of a company after an IPO and it generates a new wave of potential customers. 

Here are some tips and strategies that will help you out for making a better decision for IPO investment.

• Do your own research: When you invest in IPOs it is indirectly investing in Private companies. Private companies do not have many disclosure norms which make them very secretive and they hide a lot of sensitive information from the public. Even expert reviews of IPO have information collected that is publicly available. There is no in-depth research conducted by them that includes any research on internal workings or the company’s financials. 

Although the red herring prospectus of the company has a good picture of the company which is approved by the SEBI. As this prospectus is written by the company, they will window dress their flaws and try to show their company as flawless. So before you invest in IPOs make sure you do your own detailed research rather than relying on any third-party research.

• Know the funds that are you investing in: The red herring prospectus will enable you the information on how the funds are being utilized. It is very important to know this, it should not be the case that the company is raising funds to repay its liabilities. Instead, a company that is raising funds for research and expansion is more favourable to invest in. Moreover, such a company is worth your time and money.

• Read the Red herring prospectus: You should always read the red herring prospectus when you invest in IPO. You are going to become an equity investor and unlike a debt investor, you are not having safety. It is very important to read it in detail and know its purpose. 

• Go through the Valuations: It is a difficult task for retail investors to find the exact and correct valuations of a private company. Additionally, you should set a benchmark for valuation against the peers of that company. The valuations will be kind of provided by investment bankers and underwriters to make sure you analyse them properly.

• Invest at a Cut-off price: IPO investment is highly dependent on luck. You bid on the price which is specified within the price band. Your price should be at the cut-off price to ensure that you get the allotment. Moreover, if you invest at the cut-off price then only your application will even be considered for the final allotment price.

• Go for IPOs that are backed by strong brokers: IPOs are managed and controlled by the brokers. Big brokers underwrite for a big or strong company only. But just seeing the name of a big broker you should not jump to buy the IPO. Additionally, you should consider the fact that IPO that is backed by a strong reputed broker is a good thing.

• Plan an Exit Strategy: A very important tip for short-term investors in IPO is to Plan an Exit Strategy. You should make the decision that at what level you are going to sell the shares and book profits. Generally, shares of a good company list at a high level and drops in value over time. Moreover, short-term investors should who want to exit in a couple of days should pre-decide it. Also decide loss levels if the IPO does not work in your luck, setting up of stop loss and booking profit is important. 

• Be Skeptical: IPO investments are considered safe but they are quite not because you have to rely on a broker's advice as information is not readily available. Many times broker might tell you to invest as he will be getting a good brokerage or to complete his target. You should be skeptical of the advice and make a decision on good research. 

• Know the Lock-in Period: Insiders and underwriters have a legal contract for holding shares. After the lock-in period when the underwriter will start selling the share the price will fall. It goes to show that the brokers are not confident about the future prospects of the company. Also if the underwriter does not sell or holds the share after the lock-in period it is a good signal.

• Probe the Management and Promoters: IPO is like an exit window for promoters sometimes. You should do a background check of promoters and what experience they have of the company before you invest. You should also pay attention to the management of the company.
  
  
  You have to open a demat account, in order to invest in IPO. Select the best demat account with minimum charges. You can check out the charges of HDFC Demat account.

To sum it up, we looked at what is an IPO? The answer to that is: IPO is short for Initial Public Offering. It is done when a private company sells the shares of the company to the public in order to raise money for the first time. Moreover, we looked at what are the reasons why companies want to go for an IPO. And lastly, we looked at various investment tips and strategies for investing in IPO.