When a private company goes public, it lets the public to subscribe its shares. Investors can earn a handsome profit by investing in IPO only with a planned strategy. Investing in IPOs of all companies might not always bring substantial profits. There have been many public offerings that fail miserably leading to losses for investors.
It is true that you cannot gain from your investment without facing any risks. However, following proper strategies is the best way to deal with these risks and earn profits. This article will provide tips for investing in IPO to beginners and other investors.
7 Tips for a Successful IPO Investment
If you have been planning to invest in a public offering in the future, follow these crucial tips to maximise chances of better returns:
Conduct Thorough Research
You need to opt for a thorough market research before investing in an IPO. It may seem a cakewalk to collect information on companies that announces themselves in an IPO, but it is not. Even though they attempt to disclose their prospectus-related information, it cannot be fully trusted as the company itself writes them.
So, you can conduct online research to fetch information on the company’s financing, past press release, overall industry performance and so on. Though it is hard to find the actual data from a reliable medium, firm research is the first step to investing in a profitable IPO. Try to gather company information from other sources to ensure its authenticity.
Select a Company with Strong Underwriters
Underwriters and brokerages evaluate the companies announcing themselves in IPO. After evaluating their finances, promoters, business model, etc., these underwriters proceed with the company’s IPO. So, you need to select a company that has a reputed underwriter for a profitable IPO investment.
Reputed underwriters follow a selective method while choosing companies for IPO listing. On the other hand, small firms keep on approving every company that opts for the listing. So, you need to choose a large-scale broker while investing in an IPO.
Go through the Company’s Prospectus Carefully
A company has to file its Red Herring Prospectus when it decides to launch its IPO. Make sure to study a company’s prospectus properly. It will let you know the companies' opportunities, money usage perspective that will be raised through the IPO, etc.
For instance, if you find a company is raising money to pay its debts, you better avoid investing. This is because it implies the company is already facing loss. So, it cannot be profitable for you in any way. On the other hand, if a company raises money to expand, it indicates better possibilities for the company. So, investing in such an IPO can be profitable in the long run.
Keep a Check on the Promoter’s Background
One of the essential tips for investing in IPO to beginners and other investors is to look for the promoter's background. You should know about the promoter's experience to take a better investment decision. It will also help you to understand if the company has any records of default payments against bank loans. The promoter's background will impact the company's reputation.
Wait till the Lock-in Period is Over
If you have pre-IPO stocks, you cannot sell the shares during the lock-in period. It can be advantageous to wait for the lock-in period as you can analyse whether the stock is profitable and avoid the risks of volatility. So, if you find a company's stocks are still being held even after its lock-in period, you can plan to invest in its IPO.
Brokers and underwriters often hold a company’s share even after its lock-in period when the company has a strong base. It represents the company’s growth and stability. Generally, the lock-in period starts from 3 months and can extend up to 2 years. Underwriters or stockbrokers cannot sell shares during this period.
Stay Updated with the Market Trends and IPO Performance
An IPO features a strong fundamental when it can earn profit even in bullish market trends. So, you can easily invest in such an IPO for assured profit. There are several factors to determine the market trends, and it involves stocks from various sectors. If you want to invest in an IPO, do not miss following the market trends for a wise decision.
Approach with Proper Account Type
You should either have a Demat account or a trading account to invest in an IPO. With a Demat account, you can deposit mutual funds, government securities, share certificates, etc., electronically. A Demat account can be opened in any registered DP with zero shares. You cannot own any share market stock without this Demat account. This account is necessary for buying shares in IPO.
However, if you wish to sell these shares in future, opt for an online trading account. The online trading account will be linked to your bank account. So, before investing in an upcoming IPO make sure to open a Demat account. You cannot participate in any IPO without this account.
Final Note
So, now that you know how to invest in IPO, you can increase your wealth by investing in the right IPOs. The mentioned strategies will help minimise the risks of losses during IPO investments. Besides, you can study reliable websites and newsletters to check the lists of IPOs that you may invest in. You can rely on reputed brokerage firms if you don't know how to invest in IPO. They will guide you with all the necessary requirements.