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What is an IPO?
IPO or Initial Public Offer is a process of transferring some shares of a new or unlisted company to investors to raise funds. Consider you are running a business and you need money to expand or develop your business. where will you get that money?. You will ask your friends, relatives, or approach for a loan. If a huge sum of money is needed you may ask your friend to invest the money by making him a business partner. Likewise, if an unlisted company needs funds for its future project, expands or repays the debts, it issues shares to investors for the very first time and raises funds according to its requirement. This process of investors buying shares directly from the company is IPO and it is one of the methods to raise funds.This year many upcoming IPO planned to issue in the market. Factors to be considered before investing in an IPO are discussed below.
Prospectus of the company.
Before applying you should know the company well and should read the prospectus for the issue contains information about the company financials, its record in the market, and the objective of issuing. On the company’s website or SEBI website, you can find the prospectus.
Over subscription.
Over subscription is one of the essential deciding factors for investors particularly retail investors to decide whether to go for an IPO or not. Many of you think if an IPO is oversubscribed then there is a great demand for that IPO and financially sound, so you will subscribe assuming there will be listing gains. The assumptions on over subscription are not correct.
Because the shares offer on IPO is limited and allocation to each category of investors( QIB, NII, and Retail investors) is pre-decided. These days most of the time the number of applications made is surpassing the number of shares on offer. This may result in getting few or no shares you have applied for.
Grey Market Premium.
Grey Market Premium is not a reliable indicator but you should consider this to know the demand of the IPO. Grey Market Price is dynamic, changes every day, and unofficial but still the investors will look for the price in the grey market to predict the price of the share on a listing day. Suppose a company comes with an IPO of Rs 100 and the grey market premium is Rs 50 then you can estimate the price of the IPO is Rs 150 on listing day. If the IPO Price in the Grey Market is discount it is the signal of less demand. Even though there is no reliability, Grey Market Premium works in many cases.
Valuation of a Stock.
The Valuation of a stock should be considered before investing in an IPO. The best way to do this is to compare with its peer competitors. In certain cases, the listing company may be the first one in the sector and no competitors are listed. In that case, you have to do valuation techniques like price to earnings ratio and return on equity.
The Objective of raising capital.
You should analyze the objective of raising capital is for the growth of the company or exit route to promotors/investors. A smart investor will think twice before the subscription of the IPO if the capital raised is used as an exit route to promotors.
Research before investing
Risks are also present in investing in an IPO. Some of the IPO’s will yield good profit in a quick time and some may result in little loss. Every IPO will not yield profit so research before investing in an IPO.
Check the IPO allotment status.
To check the allotment status of the subscribed IPO kindly click here