The initial public offering is a public offering in which the shares of the company are sold to institutional investors and retail investors. It is simply a process of offering shares of a private corporation to the public in a new stock issuance. It allows the company to raise capital from the public to meets its working capital requirement, update technology etc. We will discuss “IPO Investment Strategy” in this article.
It is a great way to earn money in terms of huge returns if you are smart enough to invest. Though risk and benefits go side-by-side, so make sure to smartly invest in it.
About IPO
IPOs can be classified into two types- fixed-price offering and book building offering. Fixed price offering refers to the fixed issue price set by the companies which are settled to be sold initially. The investors will come across the price of the shares that the businesses decide to make public.
In the book building offering, the companies offer IPOs at 20% price of the shares. The interested ones bid on the shares before the company decides the final price. So the prices of the shares are determined upon the basis of the investor’s bidding. The investment process is very easy as you have to start by making the decision in which you have to apply for by taking a look at the upcoming IPOS 2021.
Once the investor will decide about the investment, the next step is to arrange the funds. In case the investor does not have enough funds, they can avail loan from any financial institution. Then the investor needs to open a Demat account which will help in electronically store all the shares. At last, the investor can go for the application procedure. At last, the shares are allotted to the investor.
Below are some of the tips and IPO Investment Strategy while IPO investment:
Research
- It is important to look for the companies that are announcing IPOs. You can go for the company prospectus as it will disclose all the information. Make sure to do a good research online about the companies and their competition too.
Strong underwriters
The strong underwriters will ensure you get good qualities. Like on the basis of reputation, the broker will choose the companies by knowing their status in the market. They themselves will be fully sure and then recommend you for the same.
Go through prospectus
It is important to give a thorough reading of the prospectus. You can demand the prospectus from the broker which is bringing the company to your notice. It will help you to get out the lists of opportunities you can get from the money raised from IPOs.
So above are some strategies while investing in IPO. Also, make sure to know about the upcoming IPOs. Some of the Upcoming IPOs in 2021 are Utkarsh small finance bank, Fincare small bank finance, Nuvoco vistas, ESAF small bank finance, Shriram properties, ChemplastSanmar Limited, Cartrade tech and Aptus value housing finance India limited. You can get all the information from ‘5paisa’ as they are online financial service providers like mutual funds, bonds etc.
10 Tips & Strategies of Investing in IPOs
IPO Tip 1 of IPO Investment Strategy: Do Your Own Research
Investing in IPOs is like investing in private companies. Private companies don’t have to disclose all information. Companies can often hide sensitive information from the public.
Even though they are referred to as “experts”, they only review publicly available information. They don’t conduct detailed research on the financials of a company or its internal workings.
Although the red herring prospectus is a positive representation of the company, it has been approved by SEBI. The red herring prospectus was written by the company and will hide any negative information in order to protect its reputation.
Don’t trust third parties when you do your research before investing in an IPO. You should compare the company’s performance with its peers, sector analysis, and future growth projections.
IPO Tip 2: The Red Herring Prospectus
A key tip for IPO investors is to make sure you read the prospectus. You become an equity holder when you invest in an IPO. Unlike debt investors, however, you don’t have any capital security.
It is therefore important to carefully read the red herring prospectus to fully understand how your money will go. The red herring prospectus is available at:
- Website of the company
- Stock Exchange website
- Website of SEBI
- Newspapers & Magazines.
You can understand the red herring prospectus:
- Historiography of the company
- Information about the promoters
- Publication of reasons
- There are risks associated with the company
- How the company intends to use the money.
Before you invest in IPOs, you should review a red herring prospectus.
IPO Investment Tip #3: Find out Where Your Funds Are Invested
The red herring prospectus does not tell you how your money is being used. This is vital information. It is not a good sign if the company raises funds to repay its debts.
However, if a company needs to raise capital for expansion or research, an IPO Investment Strategy may be worthwhile.
IPO Investment Tip #4: Check out the Promoters & Management
Charlie Munger and Vijay Kedia are smart investors who pay attention to the management of a company.
IPOs can often be a way for promoters to exit the company. Before you invest in an IPO, make sure to do background checks on the promoters as well as their previous experience with the company. Pay attention to how the company is managed.
A high-growth company is distinguished from one that has low growth by its management. Responsible management teams can lead a company through temporary crises, and generate wealth for investors.
So, a key tip for IPO investing is to invest in companies that have strong management.
Tip 5: Invest In IPOs Supported by Strong Brokers
Brokers manage IPOs. Brokers are responsible for managing IPOs. Because big brokers are known for their care and will only underwrite IPOs of fundamentally healthy companies,
However, just because a broker is a well-known name doesn’t necessarily mean that you should invest in every IPO they have underwritten.
Kotak Mahindra Capital & Morgan Stanley underwrote the Hathway Cable & Datacom IPO. -82.68% were the listing gains for the IPO.
Small brokers, however, can also be bought and could underwrite poor IPOs. Invest in IPOs that are backed by a reputable broker.
IPO Investment Tip 6: Invest at Cutoff Price
IPO Investment is a game of chance. You must bid within the specified price range when investing in IPOs. You should bid at the cutoff to ensure that you receive the allotment. You will still be eligible to submit your application regardless of the final allotment amount.
IPO Investment Tip7: Valuations Matter
Retail investors often have difficulty determining the correct valuations for a private company. Investment bankers and underwriters try to assess the valuations of private companies based on management returns and performance. However, it is important to establish benchmarks for valuing the company in comparison to its peers.
IPO Tip 8: Design an Exit Strategy
This is a crucial IPO investing tip that short-term investors should know. It is important to decide at what levels you will sell shares and how you plan to book your profits.
Good companies’ shares usually list at high levels, but then fall over the course of several months. If you’re a short-term investor looking to exit quickly (also known as flipping), then you need to pre-decide your exit level.
Alternately you can also determine your loss levels as not all IPO Investment Strategy will work out in your favor. Investing in IPOs requires you to set up a stop loss and book profit.
IPO Investment Tip9: Understanding the Lock-In Period for IPO Investment Strategy
Retail investors should be aware of this IPO Investment Strategy & tip. Insiders and underwriters can have shares if they sign a legal agreement.
The share prices will drop if the underwriter sells shares before the lock-in period ends. This indicates that brokers don’t believe in the company’s future prospects.
Similar to the above, if the underwriters still own the shares after the lock-in period ends, it is a good indicator that they have faith in the company’s future prospects.
IPO Investment Tip No 10: Be skeptical
IPO investments are considered safe. This is false. Investors rely on the advice of brokers to invest in IPOs because there is limited information. Brokers often target institutions and high-net worth individuals for investing in IPOs. If your broker suggests an IPO to you, be cautious. HNIs and institutional investors are not likely to want to invest in this particular IPO. The broker is recommending you to sell.
Final Thoughts: IPO Investment Strategy
Companies can raise equity capital through IPOs. Not all companies raise capital for the correct reasons. Some companies raise capital to pay off their liabilities. Your hard-earned money is not used for growth, but to pay off someone’s debt.
