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Looking to invest in IPOs? Honestly, they are exciting but risky too!
IPO-issuing companies are first-timers with no stock market history or data to refer to. So, it is like venturing into uncharted territory!
And if that wasn’t challenging enough, you have a flood of IPOs hitting the Indian market, making it even more difficult to pick the right one. So, how do you begin?
We understand looking at so many IPOs at a time can make your head spin.
Thus, we dedicate a section to IPOs in our stock market classes in Pune, helping you navigate the IPO landscape and explaining it to you more comprehensively.
But this blog can prove a starting point, helping you build an initial understanding of IPOs and learn the steps involved in identifying the right one. Let’s get started.
What are IPOs?
IPOs (Initial Public Offerings) are when a private company offers its shares to the public for the first time. These offerings help companies raise funds for objectives like market expansion, make debt payments, begin new projects, etc.
However, what do IPOs mean for investors? They refer to an opportunity to buy shares in an early-stage company and benefit from the company’s potential growth.
So, IPOs are enticing. Undoubtedly!
You might benefit from the company’s rapid organic growth after going public.
However, analyzing such companies can be challenging as they do not have anything to bank on, except for their commitment towards returns.
Besides, not every IPO is created equal. So, here’s how to identify a worthwhile IPO.
Spotting the Winning IPO – Key Steps to Follow While Analyzing an IPO!
Confused with the numerous IPO options floating in the market? You don’t have to choose all but the right ones. Here are five tips that can help.
1. Company Fundamentals
At the outset, understand what the company does. It refers to the products it sells, the solutions it provides, or the services it offers. Next, examine the relevance of everything the company does in the present and future context.
Furthermore, you must assess the company’s financial performance, cash flow, and debt levels. Look for companies with healthy financials and consistent growth.
In addition, you should understand the company’s business model to determine how it generates revenue, its competitive advantages, and its target markets.
Knowing who the company’s customers are can also prove significant.
A couple of equally crucial factors to assess include the management team and its credibility, along with the company’s future prospects, plans, and endeavors.
Must Read – Future of Stock Market Investing
2. IPO-Specific Analysis
Within this context, you must check if the IPO is a fresh issue or an offer for sale.
If it is a fresh issue, the money raised will go to the company to fuel its growth. However, if it is an offer for sale, it is for the existing shareholders to sell their stakes.
Usually, fresh issues are more favorable.
Next, check the use of proceeds. Understand why the company is raising money. Good indicators usually include funds raised for expansion or debt repayment. However, funds raised under pressure might signify financial concerns.
Furthermore, do a price comparison. See the IPO price relative to any recent share issues. A significantly higher IPO price may demand being careful.
3. Assessment Metrics
IPO valuation can be tricky, particularly as the price isn’t set until the offering.
This is how you can evaluate it with some ratios.
- Price-to-Earnings Ratio (P/E Ratio)
Divide the stock price by the earnings per share. Then, compare it with the company’s competitors to determine if the stock is overvalued.
For instance, if the stock price is Rs. 100 and the earnings per share is Rs. 10, then the P/E ratio is 10. However, if the stock price is Rs. 200 and the earnings per share is 10, then the P/E ratio is 20. A lower P/E might signify a better value than competitors.
- Price-to-Book Ratio (P/B Ratio)
If the company is asset-heavy, you can use the P/B ratio. To determine it, divide the stock price by the book value per share. For example, if the stock price is Rs. 150 and the book value per share is 50, then the P/B ratio is 3.
4. Market Sentiment and Timing
Market sentiment is another significant aspect to look for. IPOs perform well in a bullish (rising) market. But they struggle to perform in a bearish (falling) market. Accordingly, you must look for current market trends and sectoral growth.
5. Lock-In Period
Usually, in IPOs, early investors and promoters stay under a lock-in period. It means they cannot sell their shares for a specific duration after the IPO.
Too much selling after listing can increase selling pressure, reducing the stock price. Thus, by knowing how long key players stay locked, you can determine the stability of the stock after it gets listed.
Bonus Tips!
Here are some additional tips to help you increase the chances of your success while picking the right IPO out of the lot.
- Choose the cut-off price instead of the lower end of the price band to increase your chances of being allotted a popular IPO.
- Apply through various demat accounts linked to different PANs, while ensuring all your applications are unique and legitimate. This will also help increase your chances of allotment.
- Check if you are eligible to fit in a quota (for existing shareholders or employees). You might as well enhance your chances of allotment.
- Excessive oversubscription can signify a solid demand and result in a premium listing. So, don’t apply on the very first day. Be patient enough to assess the market sentiment and then make an informed move.
Prepared to Invest in IPOs?
Join EMS. We share market classes in Pune with courses to help you become a player, capable of making your own independent and confident decisions.
While our courses and the results we’ve delivered speak for the value we provide, it is our faculty members, our approach and the supportive learning environment we nurture that drive our success.
So, why just keep guessing on the worth of an IPO when you have the above and when you can enroll with us and become the champion of your investments?
Do you agree? So, call us at +91 7068001919 and gear up for the big thing.
