The last three years have been a bumper year for investors who invest in
Initial Public Offering (IPO). The market was abuzz with IPOs worth billions of dollars from Zomato, One 97, Delhivery, LIC and several other companies. If you are keen to add IPOs to your investment portfolio, here is all you need to know.
What is an IPO?
An IPO is a process through which unlisted private companies sell their shares to the public in the primary market. An IPO gives companies access to more capital to run their operations, launch new products or expand their business. You become a shareholder in the company with ownership rights.
How to Make the Right Investment in IPO?
IPOs are market instruments and hence, vulnerable to certain risks such as overvaluation and volatility. Hence, you should remember the following points before investing in IPOs:
1. Research the Company
These days, a company issuing IPO creates a lot of marketing hype which may not give you realistic information. If you are interested in subscribing to its IPO, you should check these
parameters:
i. The objective of the company for launching an IPO
ii. Utilisation of IPO funds
iii. Company’s business model
iv. Company’s past financial performance
v. Company’s vision and prospects
vi. Company’s promoters and management board
vii. Company’s competition
2. Valuation
The valuation of an IPO is directly linked to the price at which the company issues shares for the first time. However, the offer price may be undervalued or overvalued. It is advisable to stay away from IPO investing in case of overvaluation. You can decide the fair value of the IPO through two methods:
i. Comparing IPO’s issue price with the share prices of the company’s competitors
ii. Analysing the financial ratios of the company
3. Red Herring Prospectus
Companies need to submit a comprehensive document to the Securities and Exchange Board of India (SEBI) 21 days before the IPO launch. This document is known as the Draft Red Herring Prospectus (DRHP). It includes all the facts about the company and IPO. It gives you a true picture of the company, irrespective of its advertisements and promotions. It is highly advisable to read DRHP before investing in a company’s IPO and look out for red flags if any. For example, if the DRHP states that the company will use IPO funds to pay previous debts, it is better not to invest.
4. Select the Best Brokerage Firm
IPO investment is a multi-step process and requires financial and market diligence to ensure that you have made the right investment. You will also need an online trading and demat account to invest in IPOs. A good brokerage firm can make IPO investment hassle-free for you.
Ajmera x-change, one of the most reputed
investment advisory services firms, can help you understand and invest in IPOs. It analyses your investment goals and risk appetite to determine the right IPO for you. It also conducts exhaustive company research on your behalf to minimise investment risks and get you better returns.