All You Need to Know About the IPO As a Beginner or New Investor
Startup culture is booming in India. When these startups reach a certain point or gain popularity, they expand their operations by converting them into a public company or raising an IPO.
Extensive advertising and promotional campaigns are run to attract investors to the issue. They attract investors by creating hype all over the media. Though issuing an IPO is a good indicator of the efficient and successful working of a firm, should you invest in the same?
The simple answer is "NO". Not all IPOs perform as per the expectations, and some can even make you lose all your money (if you don’t do your research well).
In this guide, we are going to learn strategies that new investors or beginners must follow while investing in IPOs.
What is an Initial Public offering?
Initial Public Offering is one of the widely adopted ways through which privately owned companies convert into publicly traded companies. Companies do this by selling their shares to the public. The purpose behind it is to expand the operations, do research and development, pay off debts, for a better image in public, etc.
Before a company or startup indulges in such a process, its shares are owned and held by the owners/founders, their friends/relatives, venture capitalists or angel investors. The list gets widened when an IPO is issued as investors like qualified institutional investors (QII), individual retail investors, and non-institutional investors (NII) get added to the list of shareholders.
Now, what should you consider before investing in such issues? Let's dive in.
Know your “why”
One of the most essential pointers you must be clear about is to know your purpose of investment. For this, learn about your financial goals. A few investors invest in public offerings because one of their friends/colleagues made profits by investing in an IPO. Refrain from committing such mistakes. Only invest if the issue aligns with your investment/financial goals.
Don’t let the hype attract you
Once a popular brand launches its IPO, the news spreads like fire all over the media. Remember that companies invest in a lot of promotional activities to attract investors. The purpose is to make you feel "FOMO". So before you fall for such tactics, do your research.
Check the company’s background
Remember to check the history of the company, look at its product's performance, the abilities of the management team, the qualifications of the promoters and so on. Take advantage of every detail. Once you go through all these, you’ll be able to differentiate between stable and faulty companies.
Study current trends
Studying trends in the stock market is essential. When the market is expected to rise, your investments will have the opportunity to grow. And vice-versa. So invest only when the trends are rising or are expected to do so shortly.
Research application volume
You must check the volume of applicants applying for the issue. Since many investors get intrigued by the advertisements, the number of applications is higher. The higher the applications, the higher the chances of oversubscription. In the case of oversubscription, you may get fewer shares than you apply.
Analyse the risks
Remember investing in an IPO is a risky affair. There are proven cases when investors lose all their money. So, to minimise such happenings, check the Red Herring Prospectus (RHP) of the company. Please go through it in detail as it has the information you will need, such as its strengths, the purpose of the issue, or risks to the company’s operations.
Check your risk appetite
There's a common phrase, "bite off more than you can chew", but don't apply it to investing in an IPO. Since it is risky, you must invest only some of what you have. Invest only the amount of money that you can afford to lose.
Big names do not guarantee profits
The IPO might not generate attractive returns solely because a big and famous investment bank backs it. They have more than enough funds to invest in marketing and may use different scales for calculations. You must rely on the facts and figures presented in the RHP.
How to buy IPOs?
To buy online or offline, you must have a Demat account opened. If you wish to trade or sell your securities later, a Trading account is also necessary along with a Demat account. The process looks like this:
- Choose a broker like Upstox and open a Demat account that allows you to have access to the IPOs of various companies.
- Have a look at the list of the companies offering their issues and do your research as mentioned above.
- Choose the one you feel confident to invest in.
- Provide your payment details.
- Decide your desired number of lots.
- If the issue is undersubscribed, you may get the same number of shares/lots you applied for. In the case of oversubscription, you may get fewer shares than applied.
- Keep a check on your emails to check the allotment details of the shares.
- Shares will get credited to your Demat account before the day of listing.
- If you wish to sell or trade, wait for listing dates. You can check these dates via websites of the stock exchanges such as NSE, BSE, etc.
Final words: Is investing in IPOs good or bad?
Investing in such options can be both good and bad. It can be a good decision when you do your proper research, do not fall for marketing tactics, study the company’s credentials, check your risk appetite and invest only when the IPO aligns with your goals.
It can also be wrong when you buy because your friends are doing so. You need more experience, ignore risk factors, don’t pay attention to RHP and so on.
Hence, you must invest only when you have enough experience, are ready to put in all the effort, agree to invest for longer horizons, and have the required risk tolerance. Remember, it is a highly unpredictable investment option.
Frequently Asked Questions
Should beginners invest in the initial offering of the companies?
If you do enough research about the company's financials, its historical performance, go through its RHP, keep an eye on market trends, etc., you can invest your funds in the same.
Can I sell IPO shares immediately?
No. You cannot sell your shares before the market opens on a listing day.
Is IPO income taxable?
There is no tax applicable when you receive shares in your Demat account. But if you sell your shares and make a gain, you have to pay tax on the capital gains as per your holding period.
Do initial stock offerings always give profits?
No. Sometimes, investors lose all their money because a company may be valued incorrectly. In such cases, the prices of the issue never experience an increase in stock prices.