Many of us fantasise about making money by investing in stocks. While some people like to participate in mutual funds or trading, others prefer to invest in an IPO or initial public offering. Profiting from IPOs is not as simple as it sounds, but with a well-planned strategy and a few useful hints, one may invest in IPOs and be confident that they will provide excellent returns. There are a number of well-known companies that had incredible gains on the first day of their IPO, but they ultimately disappointed their investors.
Every other week, a new Initial Public Offering (IPO) may be announced in the market. This is the first time a company’s shares are listed for trading. The equities are then available on the secondary market, which is the normal market where most of the everyday buying and selling occurs.
However, investing in an IPO is a difficult task. You must compete with lakhs of other investors for a few shares.
Examine the company’s performance.
Before investing in a company’s IPO, investigate the company’s performance year after year. Before launching an IPO, one should also watch for any sudden growth in the company’s revenues. If the company’s revenue is increasing at a rate of 20% per year, it suggests that the company is doing well. If the company’s performance falls below that of the industry, the company may be an underperformer. In such instances, it is possible to hunt for better companies to invest in.
Choose a corporation with a robust broker network.
Investors must understand that strong brokers are always helpful in bringing outstanding companies public. When selecting organisations with smaller brokerages, one must be more cautious. However, one advantage that small brokers have is that they have a smaller client base, which makes it easier for an individual investor to participate in pre-IPO shares. However, as previously stated, it is critical to conduct your own research on the company before investing.
Investigate the promoters’ backgrounds.
This is one of the most crucial factors to consider before investing in an IPO. Inquire about the company’s promoters’ backgrounds and experience. Check to see if the company has any payment defaults from any banks, as the performance of the promoters will undoubtedly affect such default in payments.
Read the prospectus for the company’s initial public offering (IPO) carefully.
Investors should never disregard prospectors. Read it thoroughly, but never place all of your faith in the prospectus. Despite the fact that it is a fairly boring read, it will provide you with information on the risks and prospects that the firm has to offer. This would also include information on how the proceeds from the IPOs would be spent. For example, it is not a good sign if the money is used to repay loans or to purchase shares from private investors, among other things. Companies that would use the cash for research or market expansion must be chosen.
Always wait until the lock-in time is over.
The lock-in period might range from 3 months to 2 years, and stockbrokers or underwriters will be unable to sell their shares during this time. If the brokers or underwriters are still holding on to their shares of stock after the lock-in period has expired, it indicates that the firm is doing well and that they want to grow their assets.
