IPO Investment Strategies - How To Find A Good IPO & Invest?
November 11 2021 | Reading Time: 5 Minutes
An Initial Public Offering (IPO) offers retail investors an opportunity to partake in the company ownership. Investing in an IPO of a growing company can be immensely profitable. However, with hundreds of companies going public every year through various stock exchanges, how do you find the right IPO to invest in? In this article, we’ll provide you with key IPO investment strategies that can help you increase the probability of choosing the potential IPO winners.
10 Strategies to Finding and Investing in a Good IPO:
Through such thorough research, you might obtain information that may not be accessed through third parties and the company’s Red Herring Prospectus. Furthermore, information thus obtained tends to be more unbiased and objective than that provided by the company itself.
Another tip is to look for oversubscription in the Qualified Institutional Buyer category. This is often a positive indicator of a good IPO because institutional investors are professionals in the investment field. These buyers invest large amounts of money only after intense research about the company.
While choosing to invest in an IPO of a company, a key strategy is to select the one which has good quality underwriters and management.
Often, brokers with good reputation tend to be selective and associate with and underwrite for good quality firms.
Remember that though there is a higher probability of small or boutique brokers allowing individual investors to invest in pre-IPO shares, they necessarily may not be better than large-scale brokers.
Furthermore, ensuring that the company has a well-reputed management team, who can drive the future growth of the company, increases the possibility of the success of the IPO and sustained gains.
The IPO prospectus, which can be obtained from the company, stock exchange or SEBI websites, newspapers and magazines, provide very valuable information regarding the IPO and the company at large.
Keep in mind that while the prospectus should not be your sole source of information, you should never underestimate its worth. Go through the document carefully. Does it look promising?
The prospectus will give you, as a retail investor, the information regarding the company's background details, details of promoters, risk factors, long-term goals, potential, and opportunities, how the capital raised is to be used, and future earnings outlook. Analyse and carefully assess the information obtained.
Pay particular attention to how the company plans to utilise its funds and its scope for growth. If a company is using the money to clear its debts and has very vague or overtly positive goals for the future and growth potential, you know that it is not a wise IPO investment.
Though this process may be a little technical and complex, it is always better if you, as a retail investor, are able to assess the valuation of the company based on the prospectus and the information gathered through your research. Compare the results with a listed peer. This way you will get an idea about whether you are making a wise IPO investment choice.
Like in any other investments, IPO investments too require you to be cautious . Brokers may not always be completely honest with you especially if you are new to the field. So a good strategy is to be suspicious if a broker continuously insists that you invest in a particular IPO.
Choose good, well-reputed brokers to assist you in picking the right IPO.
Prior to their IPO launch, companies conduct roadshows to create awareness and catch the attention of potential investors. Do not assume that larger media coverage signals a good or successful IPO investment. Similarly, remember that it is not always necessary that good or big brands soar after their IPO launch. Invest based on your research and not on the hype created around the IPO or the popularity of the company’s brand name.
Every IPO investment need not result in success. A good exit plan is as important as the decision to invest in a good IPO. Plan out your exit strategy. Determine at what loss percentage you want to cut your losses and protect your capital.
Incomplete forms are rejected so ensure that every detail asked for in the IPO application form is filled.
By bidding at the cut off price you strategically ensure that you will be allotted shares if the IPO is oversubscribed.
A key IPO investment strategy is to patiently wait till the end of the lock-up period. A lock-up period is the period within which the inside investors or corporate investors are forbidden to sell their shares after the company shares are listed in a stock exchange. If the corporate insiders sell their shares after the period expires, chances are high that the IPO is not a good investment as these insiders have a clearer understanding of the company and stock performance in the future.
FAQ:
1.How do you know if an IPO is profitable?
By conducting proper research, you can increase your chances of knowing if the IPO will be profitable or not. Potential IPO winners have strong fundamentals and good scope for future growth.
2.Is investing in IPOs a good strategy?
IPO investment, though not always successful, is one of the best investment strategies. Investing early in companies with strong fundamentals often ensures you sustained, long-term profits.
3.Does the price always go up after the IPO?
The price may not always rise after the IPO. An example of a successful IPO is that of Burger King. An IPO that failed despite the hype was that of Cafe Coffee Day.
4.Can an IPO be purchased on margin?
Retail investors cannot obtain margin funding to buy IPO shares unlike High Net-worth Investors, who invest more than Rs. 2 lakh in an IPO share purchase.
10 Strategies to Finding and Investing in a Good IPO:
- Conduct your own in-depth research:
Through such thorough research, you might obtain information that may not be accessed through third parties and the company’s Red Herring Prospectus. Furthermore, information thus obtained tends to be more unbiased and objective than that provided by the company itself.
Another tip is to look for oversubscription in the Qualified Institutional Buyer category. This is often a positive indicator of a good IPO because institutional investors are professionals in the investment field. These buyers invest large amounts of money only after intense research about the company.
- Select the company with a strong team of underwriters and good quality management:
While choosing to invest in an IPO of a company, a key strategy is to select the one which has good quality underwriters and management.
Often, brokers with good reputation tend to be selective and associate with and underwrite for good quality firms.
Remember that though there is a higher probability of small or boutique brokers allowing individual investors to invest in pre-IPO shares, they necessarily may not be better than large-scale brokers.
Furthermore, ensuring that the company has a well-reputed management team, who can drive the future growth of the company, increases the possibility of the success of the IPO and sustained gains.
- Read the prospectus carefully:
The IPO prospectus, which can be obtained from the company, stock exchange or SEBI websites, newspapers and magazines, provide very valuable information regarding the IPO and the company at large.
Keep in mind that while the prospectus should not be your sole source of information, you should never underestimate its worth. Go through the document carefully. Does it look promising?
The prospectus will give you, as a retail investor, the information regarding the company's background details, details of promoters, risk factors, long-term goals, potential, and opportunities, how the capital raised is to be used, and future earnings outlook. Analyse and carefully assess the information obtained.
Pay particular attention to how the company plans to utilise its funds and its scope for growth. If a company is using the money to clear its debts and has very vague or overtly positive goals for the future and growth potential, you know that it is not a wise IPO investment.
- Assess valuation:
Though this process may be a little technical and complex, it is always better if you, as a retail investor, are able to assess the valuation of the company based on the prospectus and the information gathered through your research. Compare the results with a listed peer. This way you will get an idea about whether you are making a wise IPO investment choice.
- Be skeptical and choose good brokers:
Like in any other investments, IPO investments too require you to be cautious . Brokers may not always be completely honest with you especially if you are new to the field. So a good strategy is to be suspicious if a broker continuously insists that you invest in a particular IPO.
Choose good, well-reputed brokers to assist you in picking the right IPO.
- Do not fall for the hype or the brand:
Prior to their IPO launch, companies conduct roadshows to create awareness and catch the attention of potential investors. Do not assume that larger media coverage signals a good or successful IPO investment. Similarly, remember that it is not always necessary that good or big brands soar after their IPO launch. Invest based on your research and not on the hype created around the IPO or the popularity of the company’s brand name.
- Prepare a good exit strategy:
Every IPO investment need not result in success. A good exit plan is as important as the decision to invest in a good IPO. Plan out your exit strategy. Determine at what loss percentage you want to cut your losses and protect your capital.
- Fill every detail in the form to avoid rejection:
Incomplete forms are rejected so ensure that every detail asked for in the IPO application form is filled.
- Bid at cut-off price:
By bidding at the cut off price you strategically ensure that you will be allotted shares if the IPO is oversubscribed.
- Monitor the post lock-up period:
A key IPO investment strategy is to patiently wait till the end of the lock-up period. A lock-up period is the period within which the inside investors or corporate investors are forbidden to sell their shares after the company shares are listed in a stock exchange. If the corporate insiders sell their shares after the period expires, chances are high that the IPO is not a good investment as these insiders have a clearer understanding of the company and stock performance in the future.
FAQ:
1.How do you know if an IPO is profitable?
By conducting proper research, you can increase your chances of knowing if the IPO will be profitable or not. Potential IPO winners have strong fundamentals and good scope for future growth.
2.Is investing in IPOs a good strategy?
IPO investment, though not always successful, is one of the best investment strategies. Investing early in companies with strong fundamentals often ensures you sustained, long-term profits.
3.Does the price always go up after the IPO?
The price may not always rise after the IPO. An example of a successful IPO is that of Burger King. An IPO that failed despite the hype was that of Cafe Coffee Day.
4.Can an IPO be purchased on margin?
Retail investors cannot obtain margin funding to buy IPO shares unlike High Net-worth Investors, who invest more than Rs. 2 lakh in an IPO share purchase.
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