Things to Know Before Investing in IPO

What is IPO?

IPO or Initial Public Offering is a kind of security that is offered by a company directly to the end investor. An initial public offering is a technique utilized by a company to have access to more funds in order to scale up their operations or to develop their business. In an IPO, the organization offers an investor a cut its own right to profits in the way of shares.

An initial public offering is exchanged at the primary stock market - an investor can directly purchase shares from the company and then trade it in the secondary stock market. In the secondary stock market, the shares are listed and traded on a day-to-day basis by investors. A company issuing an IPO can issue any number of shares as approved by its articles. The Collective raised from the issue of the IPO is known as "raising capital" by "going public."

Before investing in an IPO, the investor has to take the following factors into consideration

1. Authentication of the background

Before investing in the IPO, an investor needs to know the history and operations of the company, the investor needs to review and analyze the company’s financial performance in the past years along with the management decisions executed by the company.

2. The background of IPO

Having complete knowledge of the purpose of the IPO listing and the company’s plan to use the funds after the Initial Public Offering is fully subscribed is an essential point for an investor. If an investor is not able to understand all these details then he can easily look for an IPO advisory who will explain the pros and cons of the investment.

3. Read the prospectus

The prospectus is the most important document to be read by the investor before investing in the share market. The prospectus contains all the important information about the IPO distribution and the purpose for which the funds collected will be used. The prospectus contains all the necessary information including the company’s financial reports and its past performances. All this information will help an investor to decide whether the investment in a particular IPO worth it or no.

4. Company’s value in the market

Before investing in a prospective Initial Public Offering (IPO), the investor needs to compare the value of the company with its competition. Comparing the listed price of the shares with the share price of the competitor does this. If the company is new to the market and has no companions, then it is wise to estimate its valuation by using the price to earnings ratio and return on equity.

5. If there is a delay in the IPO

If a company tries to delay its IPO, there are chances that the company is just waiting for the market condition to improve or the volatility of the market to reduce. Although, if the IPO has been delayed certain times for other reasons, then one should invest in that IPO only after carefully analyzing and examining the reason of delay and the company’s performance during the delay period.

6. Be cautious

Being cautious is a trait of an investor, as the market is such that it can be too risky at times. There is a lot of uncertainty around the IPO’s due to their lack of past performance or unavailable information. The investor should be alert when investing in IPO by researching and knowing the entire scheme related document.

It is always better to know the risks involved before investing in an IPO. Always consult an IPO advisory before investing.

A financial advisor with vast experience in the investment and financial domain. I share my options based on research and analysis.