5 tips for investing in IPO

13 Oct 2021|

2 min read |

by ICICI Securities Team

Introduction

An IPO, or Initial Public Offering, is an offer through which a private company sells a portion of its shares to the public for the first time on the stock exchange. Many among us love the IPO route to the Stock Market. Making profits by subscribing to an IPO is, however, not a walk in the park. But if you invest in the right IPO and have a well thought out strategy, you can generate good returns from your investments in IPOs.

Many companies have had impressive gains on the first day of the IPO but disappointed investors in the long run. Similarly, many companies did not make gains on the first day of the IPO but made strong returns in the long run. All investments come with risk, and you cannot expect to double the return by a stroke of work.

It helps to choose IPOs that look beneficial over the long term. Here are some IPO investment tips to guide you:

IPO Investment Tips

Check the company history

Before investing in the company IPO, always check their performance over the years. Look at the revenue trend and if there is a sudden increase, dig deeper into it. A 20% annual revenue growth shows that the company is doing well. However, if the development is lower, the company may be an under-performer, and it is better to avoid investing in IPO.

Additional Read: Can I apply for IPO without a demat account?

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5 Guidelines for beginners IPO Investor

Choose a company with strong brokers

Remember that strong brokers help bring the right companies to the public. But be cautious when you pick companies that have similar brokerages. When it comes to small brokers, they have a small client base, and it becomes easier for you to invest in the pre-IPO shares. However, do the research well before investing.

Do a background check of promoters

This is an important step, and many investors miss out on it. Check the promoters' background before making an IPO investment. It helps to check whether the company has a history of defaulting payments to any banks. You can find all information about the promoters and the IPO companies online.

Read the company IPO prospectus

Never make the mistake of skipping the prospectus. Read it thoroughly but do blindly believe it. You may not understand all the technical terms in the prospectus, but you get insight into the company's opportunities. It also provides details about how the company will use the money raised through the IPO. Always look for companies that plan to use the funds for research or market expansion instead of paying loans or buying Equity from private investors.

It is best to invest in companies with long-term expansion plans and keen on growing their presence.

Wait until the lock-in period

The lock-in period is the duration that the underwriters or the stockbrokers cannot sell their shares. It could range anywhere between three months to two years. If you see that the stockbrokers are holding on to their shares even after the lock-in period, it proves the company is strong, and the investment will grow.

Additional Read: How an initial public offering (IPO) is priced?

Conclusion

Follow these tips for investing in IPO. When you are well-informed and make the right decisions, you earn maximum benefits for the long term.

Disclaimer

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