IPO Investment Strategy for Beginners

Many investors suffer from IPO fever. One of its symptoms is applying for each and every IPO, thinking it's the next big thing. Although the Indian primary market sees a high volume of IPO launches, not every IPO is worth investing in.

IPO investing can be complex and overwhelming, not only for beginners but also for seasoned investors. Here’s a detailed IPO investment strategy for beginners so you can identify IPOs worth investing in.

Can a Beginner Invest in an IPO?

When companies require additional capital to fund their expansion and growth strategy, these private companies go public by selling their shares to the general public in exchange for capital.

The company going public hires an investment bank and its underwriters to help determine the share price. These companies launch their IPO in the primary markets where retail investors (including beginners), QIBs (Qualified Institutional Buyers) and High Networth Individuals (HNIs) apply for shares.

Should You Invest in IPOs as a Beginner?

Before we discuss an IPO investment strategy for beginners, let's first explore whether investing in an IPO as a beginner is a good idea.

IPO investing offers exposure to emerging companies with high growth potential at low entry cost. If the company uses the raised funds wisely, you could earn long-term capital appreciation.

When IPO shares are listed on the stock exchange, they often trade at a higher price than their issue price. However, this is not always the case. If shares are listed at a discount, it can lead to investors selling their shares to cut losses, causing the price to decline further.

Invest in an IPO only if you’ve done your research and are confident of the company’s future growth.

How Beginners Can Invest in an IPO

To help make IPO investing less daunting for you, here’s a detailed IPO investment strategy for beginners.

Read the Red Herring Prospectus Carefully

Before the IPO hits the market, it is mandatory for the company to submit a Draft of the Red Herring Prospectus to SEBI. Once it is approved, it is shared publicly on SEBI’s web portal.

A Red Herring Prospectus (HRP) includes the following:

• The company’s business model and strategy
• Purpose for raising funds
• Financial details
• Risk factors
• Details about the company’s board of directors and promoters
• Pending litigation and legal proceedings, if any

Analyse Company Financials

Review the HRP’s consolidated and standalone financial statements and focus on revenue growth, core operating profit, and interest payments to gauge the company's post-listing performance.

Understand the Purpose for Raising Funds

Understand how the company plans to use the funds raised and whether those funds will be reinvested in R&D, infrastructure, expansion or towards repaying existing debt.

Monitor Market Conditions

Before applying for an IPO, assess current market conditions and invest during a rising market to ensure better performance.

Avoid Grey Market Premium

Grey Market Premium (GMP) is an unofficial and unregulated market where securities are traded over-the-counter, outside the stock exchange. In IPO, Grey Market Premium is the premium at which IPO shares are traded in over-the-counter markets before listing on the stock exchanges.

GMP is often considered an indicator of how the IPO will perform post-listing and represents market sentiment. A higher GMP means there’s a high demand for the shares, while a lower GMP indicates low demand.

But GMP isn’t a regulated or even reliable barometer of an IPO’s performance after listing. Stick to facts disclosed in the RHP and avoid assumptions and GMP to make data-backed decisions.

Aim for Long-Term Gains, Not Listing Gains

Some investors apply for IPOs expecting the shares to open at a higher price than the issue price to earn listing gains. But some IPOs open at a lower price, leading to a loss. Hence, it is recommended to invest in an IPO aiming for long-term gains instead of listing gains.

Use ASBA for Application

SEBI introduced the ASBA (Application Supported by Blocked Amount) method for IPO applications. Instead of paying upfront, the application money remains in your bank account but is temporarily blocked until allotment. If you are allotted shares, the amount is debited; if not, the funds are unblocked and are available for use.

Risks of Investing in IPO as a Beginner

Investing in an IPO as a beginner can be risky if you can’t read financial statements and lack fundamental analysis skills. Instead of applying for overhyped IPOs, do your own research and invest only if you’re confident in the company’s potential and future performance.

FAQs

What is an IPO?

IPO refers to the process by which private companies go public to raise capital by selling their shares to fund their expansion and growth.

How can beginners invest in IPOs in India?

In India, beginners can invest in IPOs by applying for the shares via SEBI-registered brokers, like Upstox or through UPI apps or Banking apps.

What is the right IPO investment strategy for beginners?

Beginners must see beyond the artificial hype and fundamentally analyse the company, financials, and the purpose for going public before investing in its IPO.

Is IPO investment safe for beginners?

Yes, IPOs are strictly regulated and monitored by SEBI (Securities and Exchange Board of India).

How to choose the right IPO for investment

To choose the right IPO for investment, read the company’s Red Herring Prospectus (RHP) to analyse its financials, business model, risk factors, pending litigation and purpose of raising funds.

What factors should beginners consider before investing in an IPO?

Beginners should consider factors such as company financials, business model, risk factors and the purpose for going public before investing in an IPO.

Why do some IPO applications not get allotment?

Due to oversubscription, which is quite common, a lottery system is used to assign and allot shares. Hence, some investors may not get the shares.

Should beginners invest in IPOs for listing gains or long-term?

When investing in IPOs, beginners should aim for long-term gains instead of listing gains, since listing gains aren’t guaranteed.

What are the listing gains in an IPO?

When the IPO shares open and list on the stock exchange for a higher price than the issue price, and the investors sell them to book a profit, it is called ‘Listing gains’.

Can you sell IPO shares on the listing day?

Yes, you can sell IPO shares on the listing days to book profits or cut losses.

What is IPO GMP (Grey Market Premium), and should beginners rely on it?

Most beginners consider Grey Market Premium (GMP) to be an indicator of an IPO’s post-listing performance, but it’s not a reliable indicator.

What happens if you don’t get IPO allotment?

If you’re not allotted shares, the application money will be refunded to your bank account. And if you’ve applied via ASBA, the blocked funds will be unblocked and available for use.

Are IPOs better than secondary market investing for beginners?

IPO offers access to emerging companies at low-cost but has less historical data to analyse, whereas in the secondary market, you have more data to analyse and liquidity to facilitate smooth buying and selling of shares.