10 Tips for IPO Investment (Initial Public Offering)

10 Tips for IPO Investment (Initial Public Offering)10 Tips for IPO Investment (Initial Public Offering)

There are several companies lined up for IPO’s in India for 2013. While there might be good companies, unless an investor knows its complete details he / she would end in investing in bad company and ruin their investments. Investors bagged good returns for the IPO's which came in 2012. Since we are beginning of the 2013, I thought I should share the some good tips which an investor should look at it before going for IPO investment.

10 Tips for IPO Investment (Initial Public Offering)

  1. How is Company Performance?
  • Look at how the company is being performed year on year compared to its industry.  We also need to look at any surprise increase in revenues before the IPO issue.

    • If the revenues are growing say at an annualized growth of 20% and industry performance is lower than this, this is good indication that company is growing at a faster pace.
    • On the other hand, if company performance is lower than industry performance it is indication that the company is underperformer and there are better companies to invest in.
  • How are the profit margins increasing? Is the EPS (Earnings per share) is increasing year on year? If the EPS is declining then the share holders returns are coming down and investors need to be cautious regd this. Company with high EPS compared to its peers would be good investment option.
  1. Check promoters background: This is one of the main points to be checked before you go Investment in IPO. What is the company promoter’s background? How much experience do the promoters have? How much industry experience do the promoters have? Does the company defaulted for any payment to banks or financial institution earlier? The promoter’s performance would impact such default payments.
  2. What is the objective of the IPO? What is the purpose of the current IPO? Is the company planning to go for expansion? If the planned expansion would lead to increase its market share? These questions quickly answer us, how the current issue money of IPO would get utilized and how company would get benefitted and would grow.
  3. Read the company IPO prospectus: Generally, investors would not read the IPO prospectus before doing investment in IPO. It is important that every investor read the company prospectus which outlines all the factors of the company, risks, objectives etc. This would give fair idea about what is the company, what are the long term objectives etc., instead of just believing what a broker or a blog specifies about IPO Investment.
  4. What are the future prospects of the company? With the current prospects, how the future prospects of the company looking like. Who are the competitors and how the competition can increase? These would effect the future of the company.
  5. Look at the issue price: Is the issue price is overpriced or under priced. Compare with its peers based on P/E Ratio. P/E ratio should be lower or comparable with its peers. If you are paying higher price comparing to its peers, there is every chance that the price would fall after it is listed on stock exchanges. This one of the aspect where investors do not look at it before investment and later think that IPO investment is not their cup to tea after incurring loss.
  6. How reputed at stock brokers / underwriters are? One more point to note is how reputed are the stock brokers or underwriters are? If you see any small companies acting as a underwriters, there is risk involved as such companies might not have good experience in such IPO’s.
  7. Wait for lock-in period: Generally stock brokers or underwriters or insider of the company cannot sell their part of shares during lock-in period. The lock-in period is generally 3 months to 2 years. If they are still holding any stocks beyond the lock-in period, it indicates that the company might be strong and they want to grow their investments. However you cannot implement this before buying the IPO, but it would be helpful if you want to hold the investment or not.
  8. Research data is scarce and very limited, use if effectively:  These companies’ data is not available everywhere on internet. The data is limited to what company is saying and what they filed with SEBI. There is no analysts reviews, news for the company, public news etc., to validate whether the company is good or bad. Investors need to be little cautious about any small piece of data availabe.
  9. Rating by Rating agencies: Based on the requirement, the companies which are going for IPO need to get their ratings for IPO from Rating agencies. Generally the ratings are in the range of 5 to 1. 5 means good and 1 means bad. Invest in IPO's where the grading is 3+ which indicatets "Good" or "very good" fundamentals.

Conclusion: You would be a winner in IPO investment, if you implement these tips. It may take some time for you to analyse these things, but is worth spending time before you do Investment in IPO.

Readers, I invite your comments and suggestions on this article.

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10 Tips for IPO Investment (Initial Public Offering)

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