How to Choose an IPO for Investing

IPO stand for Initial Public offering. IPO is the Primary market Trades of a company shares which wanted to raise money for its business operations, Expansion and several other reasons. Several companies as a part of their growth plan will go for an IPO at a particular stage and investors who are interested can subscribe in the IPO to the company shares. How to choose an IPO for Investing

An investor usually subscribes to the IPO with the expectation that the company share price will increase and in most of the time, the company will list on the stock exchanges at a higher price hence giving good returns to the Investors on a listing day. Though on a listing day most of the IPO in recent times have given huge returns to the investors, there are companies which on a listing day gave hugely loses to the investors. Stocks such as Happiest minds and Route Mobile gave bumper returns to the investors on a listing day. But the stocks such as Angel broking limited listed at a reduced price than the IPO price giving loses to the investors who sold on a listing day.

This article, we discuss how to choose an IPO for Investing and find IPO’s which can give good returns to the investors both on a listing day and also in the long term.

Things to consider who you choose an IPO for Investing

Overall Market and Economic Condition
Growth Red Hearing Prospectus
Promoter Holdings
Reasons for IPO
Competitors comparison

Overall Market and Economic Condition

In the discussion of How to choose an IPO for Investing the first thing to consider is to understand the overall economic and market conditions. If the market is struggling or the market is well placed. Understanding the overall picture of the economy is important because this affects the price of the stock on a listing day.

If the stock markets are on the bull run and the economy is in very good situation, then the IPO of a good financial company will list with bumper returns when compared to the issue price of the company.

But if the markets are volatile and the economy in the bigger picture is suffering and there is a Bearish movement that is going on in the markets. In this case, even the company with good financials may fail to list at a good premium compared to the issue price.

For example, consider the IPO of SBI cards. the company is a very well placed company in the Credit cards sector and there are many hopes for the company growth as the market share of the company is very good. But the Stock of the company on a listing day opened in RED when compared to the issue price. This is because the overall market is suffering because of the ongoing covid19 fear among global nations.

Growth Red Hearing Prospectus

The stock exchanges and Regulators wanted to create a safe and equal level playing field of stock markets for all types of investors. hence the companies are mandated by the regulatory to submit Red Hearing Prospectus before opening the IPO for a subscription. This document contains all the information about the company. How to choose an IPO for Investing

The details such as the management of the company, the Financials of the company, the business plan of the company including the loses or profits over the last few quarters or years. This document also contains all the legal cases against the company and details about the projects which are suffering with loses or legal challenges.

Understand all these things will help you understand if the company in which you are investing will have a good growth in the coming future or the company is in a risky business and may be difficult for its growth.

Promoter Holdings

When a company is going for an IPO, the company will have to issue new shares or will be selling the existing shares of the promoters of the company. The promoters of the company cannot completely sell their shares in the company. As per the rules of the Regulatory, the promoters of the company must hold a minimum of 20% of the shares.

Now when the company is issuing a large percentage of shares in the company, then it means that the promoters wanted to get rid of those shares as they see no growth in the coming future. This is a Red flag and to stay away from such companies.

But if the promoters are keeping for themselves a large percentage of shares, then it means the promoters are of the strong opinion that the company will grow in future and hence the share value. Such companies are to be selected considering all other factors ar positive for the company.

Reasons for IPO

The next and important one in the discussion of How to choose an IPO for Investing is to understand the reason for which the company is raising funds by going for IPO.

Because you are giving your funds for the company in the IPO process if shares are allotted to you, you have to understand how your money is spent and what are the details for which the company will use this funds. And how these spending will help the company will grow in the future.

All these details are clearly mentioned in the Red Hearing Prospectus document and Investors need to understand these Operations for which their invested money will be used.

Competitors comparison

How to choose an IPO for Investing the important step is to compare the details of the company going for IPO with the competitors whose shares are already listed on the stock exchanges and are traded regularly.

On comparing the company financials and fundamental with the competitors, we will get to understand if the price at which the company is issuing the shares is reasonable, premium or at a discount. Based on this understanding we can decide to choose the IPO for investing or to stay away from investing in the IPO.

Caution

Most of the times the oversubscribed IPOs will give bumper returns on a listing day. Hence all the retails investors are looking only the subscription data to guess if the IPO will give good returns or will give loses. But got get trapped in this one. Most of the times this method fails. It takes no time to changes the market condition and one single day is enough to change the market behaviour from Bullish to Bearish and without understanding the fundamental and investing just because the stock is Oversubscribed will bring you hugely loses. Stay to your fundamental analysis route and Stay careful while investing your money.