How To Pick Winning IPOs: Initial Public Offering (IPO), as the name suggests, is an offering to the general public in which shares of the company are sold to the investors for the first time. Once the listing process is completed, the company is officially called a publicly-traded company. This simply means that the securities of the company can be traded in the open market freely.
Nowadays, equity markets are flooded with IPOs. This does not mean that investors should bid for every IPO. This article will guide you as to How To Pick Winning IPOs and what points should be considered.
When to Invest in an IPO?
- IPOs are very popular with retail investors. There are several factors to consider before you plan to invest in one. First, make sure that you have read the prospectus of the company which can be downloaded from the company’s website or from the website of SEBI.
Ensure that you are thorough with the company’s business model, revenue model, projected profits, a roadmap for the next few years, and other important factors. - The next question to ask is “Why is the company planning to go public?”
Sometimes an IPO is a way for initial investors to exit and cash in on the opportunity. This can mean that initial investors don’t have much trust in the growth prospects. Therefore, before investing in an IPO, it is very critical to understand the purpose behind its listing plans.
- It is very important to understand and sense the market mood. When the markets are making record highs on a daily basis, there is much optimism among the investors. Taking cues from the dot-com bubble, it is always required to invest in companies with healthy financials and solid growth plans.
Even though there is enthusiasm in the market, make sure to check the company’s financial position. If the company’s financial position supports its growth plans, this can be a good bet. It is imperative that the financial position of the underlying company grows and strengthens.
- The next step is to check where the company plans to invest the proceeds from the IPO. If the company plans to use 100% of the proceeds in repaying debt, perhaps it means that the company can’t repay without issuing its stock. This means that its internal cash flows are not sufficient enough.
Avoid investing in such a company. On the other hand, if the company plans to expand its operations, venture out into new regions, or wants to launch a new product, then probably the company can see organic growth in the next few years. This can be a potential opportunity to capitalize on.
- Once you are satisfied with the company, make sure to have a quick glance at the sector too. It is not advisable to evaluate the stock in isolation. Understanding the sector gives a better viewpoint about the company’s growth prospects.
For example, during COVID-19, it was not advisable to invest in the travel industry or aviation industry. Careful assessment of the future potential, threats, and opportunities is required to check whether to invest in the new member of the market or not.
- Finally, focus on the valuations. We agree this can be a tricky one. How to value a company with insufficient data as this company is about to get listed? This is the most common question which pops up in the minds of the retail investor.
First-time investors can check the performance of similar companies in the same industry. This should give a fair idea of how the underlying company positions its value in comparison to its peers. If the underlying company commands a lower valuation, investors can consider shelling out their money.
However, the process of valuation involves making assumptions and is highly subjective. Still, this should give you a fair idea about where the company will stand in the industry post its listing process.
Also Read: Latest IPOS Details and Reviews
In Closing
To sum things up, IPOs can provide a lucrative deal for investors and beginners. Some IPOs can result in wealth creation if proper and adequate due diligence is conducted. IPOs do provide an opportunity for the investors to be a part of the investing journey.
However, the above points are required to be considered before making a call. That concludes our article on How To Pick Winning IPOs. Please share your thoughts on “How To Pick Winning IPOs” in the comments box below.
Happy investing!
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