Initial Public Offering or IPO is the first time when a company’s stocks are sold to the public. In the digital age, the majority of the companies are making a jump in the stock market with the intentions of making a big name and ending up with fate leaving no traces of their existence in the stock market.
Many investors putting their money in IPO get disheartened with their first IPO prices going negative. No matter how lucrative and attractive stock market investments appear to be, investors should always remember that there is no sure shot way of gaining money from stock market investments.
Finding an excellent IPO to invest in is not impossible but is undoubtedly difficult and hence requires you to do some basic research. A profitable IPO comes with certain traits that need to be understood and studied by investors. If you sort these things out, your chances of getting lucky with your IPO investments increase.
You can follow the below mentioned IPO investment strategy to find out a profitable IPO.
IPO Investment Strategies
- Selecting an IPO: If you are researching for yourself before investing in an IPO by analyzing the 3rd party data or by reading the company’s prospectus, stop right away. The best way to select an IPO for investment is to look for the subscription in its QIB category. If the QIB category is oversubscribed, then you can proceed with investing in it. This is primarily because the Institutions have better access to the data than individual retail investors. Furthermore, institutions will never put their money in an IPO, which is likely to generate negative returns.
- Check the company’s performance: Even if the QIB category of the IPO is oversubscribed, make sure to check the company’s performance before investing in its IPO. Check the company’s year after year performance. Look for any sudden increase in the company’s revenue before the launch of an IPO. If the company’s revenue is growing at a growth rate of 20% annually, it is an indication that the firm is growing well and has growth potential. A company performing lower than the industry is likely an underperformer. This is when you should look for better investment options.
- Checking the promoters’ background and intentions: This is one of the most important tips when talking about IPO investment strategy. Make sure to check the background of the company’s promoters before investing in its IPO without fail. Look for the experience they have and the interest the promoter group is diluting. If the promoters of the company are diluting their stake significantly in the company, it is an indication of loss of faith in the company. Check if there are any defaults of payments from any bank as this will impact the promoters’ performance.
- Choose a company with strong stockbrokers: Investors should always try to choose a company having strong underwriters. It is crucial for investors to understand that a strong broker will always bring quality companies to the public for raising funds from the market. It is also vital to be cautious while choosing companies with small brokerages. The best strategy is to zero-in on a strong and established broker. This is also important because getting involved in a strong and sound IPO is difficult. However, the situation is different if you have a strong stockbroker by your side.
- Read the company’s prospectus: Though an investor should not put his/her entire trust in the prospectus, it is essential for the investor to give it a thorough reading. Giving even a dry read to the company’s prospects will provide you with a clear insight into the risks and opportunities involved with the firm. The firm’s prospectus will also give you an understanding of how the funds raised through the IPO will be used. For instance, if the company plans to use the funds raised for repaying loans or for buying equity from private investors, then it is not a good choice to invest in it.
- Wait for the Lock-in Period, Always: The lock-in period can be anywhere between 3 months to two years. The lock-in period is the period where the stockbrokers or the underwriters will not be able to sell the shares of the company. If the brokers and the underwriters are continuing to hold the shares of the company during the lock-in period, it means that the firm is strong and is likely to grow in the future.
- Be Cautious: IPOs are always surrounded by a lot of uncertainty, owing to the lack of information that is available to the investors. Hence, some amount of skepticism is beneficial for investors. Thus, it is always advisable to reach IPOs with a lot of caution.
Picking the best IPOs might seem impossible, but it is not that hard if you know what exactly to look for while investing in IPOs. With so much uncertainty in place, it is always true that skeptical investors who do the required research are more likely to see their holdings perform much better than investors who invest on the basis of insights given by third parties.