How to invest in IPOs : Explained in easy steps

Last year (2021) was widely referred to as the year of IPOs in India. It saw the launch of as many as 65 mainstream IPOs, including the then biggest-ever Indian IPO of Paytm. The trend continued in 2022 with the launch of several big IPOs in the first half of the year, such as the IPOs of the Life Insurance Corporation (LIC), Adani Wilmar, Manyavar, Delhivery, and eMudhra.

Investing in IPOs allows you to acquire shares of the best-performing companies at lower prices. You can also invest in an IPO to make listing gains. However, with several big and small companies launching their IPOs these days, it becomes very crucial to invest only in the right IPOs. You should understand that not all IPOs perform as per expectations. Some of them can fail miserably and take all your money along with them.

If you’re wondering, “what should I look at before investing in an IPO?” we are here to help you with an IPO guide. Let's understand and explore a few tips that can help you determine which IPO to invest in. You should thoroughly comprehend these IPO investing tips to avoid incurring heavy losses on your investments. So, let’s get started.

What is an IPO?

Before you figure out how to choose the right IPO, you should be clear about what an IPO is. IPO stands for the Initial Public Offering. When a private company decides to sell its equity shares for the first time, it issues an IPO. This helps the issuing company raise capital from institutional and individual investors by diluting its equity ownership.

To invest in a company’s IPO, you will need to subscribe to it. An IPO is first sold to subscribers in the primary market, and then it gets listed on the stock markets for regular trading. 

How to choose the right IPO?

Now comes the main part – choosing the right IPO for investment. There are several factors one should consider while investing in an IPO. These include:

Financial background of the company

Getting information about private companies is not very easy. Unlike public companies, you will not find reports from financial experts telling you about private companies and the possible risks attached to them. Therefore, you must dig deep and conduct objective research on the issuing company.

You could search online for information on the company’s business model, competitors, press releases, and overall financial health. These factors can help you evaluate the future growth of the company and then decide whether you should invest in its IPO or not.

Business strength of the company

Evaluating the company's business strength is essential to know which IPO to invest in. Thoroughly review the company’s financial data, management credentials, and historical performance to get an idea of its business strength. Also, consider factors such as the company’s position in its industry and any USPs that give it an edge over the competition. 

Invest in a company’s IPO only if you think it has strong financial health backed by a robust business model. If you need data to evaluate a company’s business strength, refer to its Draft Red Herring Prospectus (DRHP). As per the Securities and Exchange Board of India (SEBI), every company must file a DRHP if it wants to sell its shares to the general public.

Growth potential of the company

Understanding a company's growth potential is essential to know how to choose the right IPO. A company with high growth potential can provide outstanding returns over the long term if you invest in its shares.

To evaluate a company’s growth potential, you will need to understand its business model and the industry in which it operates. You should also look at factors such as how much a company is investing in technology, how strong is its innovation and research department, how it plans to expand its business in the future, and what are its identified strengths.

If you feel that a company has scope for potential growth in the future, go ahead and invest in its IPO. However, this factor doesn’t guarantee listing gains as that depends more on the current market scenario.

Valuation of the IPO

As an individual investor, you might find this step tricky. However, understanding an IPO’s valuation is crucial and should not be overlooked.

A team of analysts and underwriters do IPO valuation to determine the fair value of the shares of a company. You can consider factors like the price-to-earnings (PE) ratio and price-to-book (PB) value of a company to evaluate the valuation of its IPO. You can also compare it with the valuation of other companies having similar businesses.

If you feel that an IPO is overvalued or overpriced, refrain from investing in it. However, if you think that the valuation of an IPO is fair, you can go ahead and subscribe to it.

Reputation of the promoters

The reputation of a company's promoters plays a crucial role in determining the strength of its IPO. If a company is backed by strong promoters, it adds credibility to its shares, and its prices can rise in the long term. 

Another factor that can boost an IPO's valuation is its promoters' nature. If a company is backed by the government or government allies, you can take it as a positive sign to invest in its IPO.

Current market scenario

Lastly, you should consider the current market scenario before investing in IPOs. Sometimes, IPOs of even the strongest companies can open in the red if the overall market isn’t performing well. Such a situation can occur due to external geopolitical situations and economic fluctuations.

If you observe turbulence in the market, it is advisable to stay away from making fresh investments. Your decision should always be backed by a thorough technical and fundamental market analysis.

To sum it up

Now that you know how to choose the right IPO for investment, you can take a well-informed decision. While investing in an IPO, you should never be influenced by the commotion around it. Instead, your decision should be backed by thorough research on the company and market analysis.

To invest in an IPO, you will need a Demat and trading account and link it with your savings bank account. If you don’t have a savings account, you can opt for an IDFC FIRST Bank Savings Account online that comes with a host of benefits, such as higher interest rates, monthly interest credit, and unlimited ATM withdrawals.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.