Factors To Consider Before Investing In IPO

  •  3m
  • 0
  • 26 Feb 2023

It is important to have a checklist before you dive into the world of IPOs. On-ly if you tick those boxes should you go ahead and invest in an IPO. Let’s go through some of the things you should consider before investing in an IPO.

Before investing in IPO, you have to ask yourself some questions to discover what kind of strategy you should follow. This is because one cannot decide on what kind of an in-vestment decision is the right one for you unless your investment goals are clear.

Further, a lot of your decisions can only be judged based on your current investment portfolio. For example, if you are heavily invested in the small-cap sector, investing in an IPO from a small enterprise may make your portfolio even more lopsided.

On the other hand, investing in an IPO launched by a large firm may help bring some balance to your portfolio.

Then, there is the question of your investment horizon. Are you planning to invest in the IPO to make a quick profit on the listing day or do you want to hold the shares for a longer period?

This will alter your IPO strategy. A short-term strategy depends on current market sen-timents whereas a long-term plan will compel you to consider the fundamentals of the company.

Questions To Ask Yourself

You’d also need to question the rationale between investing in a particular IPO. Here are some questions that will make you re-think for your own good:

Would you be comfortable to own the stock if the prices nosedived by 50%? The answer to this question will shed light on your investment goals. How much percentage of your portfolio are you planning to invest and what is your risk tolerance? Investing in an IPO is different from investing in listed companies and this question will substantiate your risk appetite. Are you planning to invest in order to “flip” (short-term strategy) it or are you investing for the long run? This question focuses on your fundamental strategy going forward. Based on this answer, the types of IPOs might change and your points of consideration might alter as well.

Once you have decided on what your investment goals are and the best strategy to achieve them, you still have to choose the right IPO to invest in. There are many factors that can help you identify the right issue. The key factors are:

1) DRHP – An Investor’s Bible

The Securities and Exchange Board of India (SEBI) mandates every company wanting to go public to file a draft red herring prospectus with them. This document is the best source of financial information about the company. Look at what the current share dis-tribution is. A higher percentage of shares held by institutional investors and banks could be a positive sign, indicating their confidence in the company. You should also find out as much as you can about the management team and their qualifications.

2) Strong Promoters

Another key factor to look at is the entity which is promoting the IPO. Key promoters could either be a company or an individual. Recognized names add a certain credibility to the issue and therefore, add a premium to the price as well. Another boost to the company’s valuation is when the company is government-owned or is promoted by someone close to the government.

3) Grading

The grading of an IPO is also an important factor. Typically, higher the grading, better the chances of the IPO being a success. But there is no definite formula to this. Compa-nies with excellent grades have had to withdraw their IPOs in the past. While grading is a good indicator, it is not the sole criterion. Look at other factors too.

4) Objective

What is the objective of the company? Where will the funds be used? Look to answer these to help judge the time frame of returns. This will also indicate the direction the company will take.

5) Do You Understand The Business?

As a general rule, avoid investing in a business you don’t understand. This is an im-portant factor. Legendary investor, Warren Buffett, always propagates: “Invest within your circle of competence.” This is because a thorough understanding of a business can help you make better decisions. It is always better to do your homework instead of rely-ing on mere hearsay.

Do you feel you have set you financial goals, made your investment strategy and done your research before you apply for IPO? If your answers are in the affirmative, it means it is a good time to learn how to apply for IPO.

Most national banks in India offer online IPO forms for application.

ASBA (application supported blocked amount) is the mandated mode of payment.

ASBA is an efficient way of managing funds. You benefit from this facility because your bank account gets debited only after allocation of shares. Until any shares are al-located, the funds remain blocked in your bank account.

  • Step 1 – Open a demat-cum-trading account with a financial institution which offers such a facility. The documents required are: PAN and ID proof like passport, Aadhaar card, driving license, voter’s card or ration card.
  • Step 2 – Log in to ASBA enabled bank portal (where you have a 3-in-1 account)
  • Step 3 – Navigate to the investment section. You’ll find an IPO/eIPO sub-section.
  • Step 4 - Select your DP (depository participant) — CSDL or NSDL.
  • Step 5 – Feed the number of shares you want and bid the price you want to buy those shares for.

Once you do that, the portal will direct you to the transfer fund in the IPO account.

Only full-service brokers with a 3-in-1 account offer online IPO investment facility. Therefore, it is essential you have your account with one such broker. In case the broker is a bank-based entity, the fund transfers from your bank account to IPO account will be processed seamlessly.

Step 1 – Open an account Step 2 – Login to your account Step 3 – Go to the IPO page in the investment section Step 4 - It will display a list of upcoming IPOs, select and apply for IPO you want Step 5 – Fill in the bid price and quantity and allocate the required funds You can check the order status once you apply for IPO.

Retail investor can invest up to a maximum of worth of Rs 2 lakh in an IPO. The guidelines of SEBI are designed to maximize retail allocation and hence proba-bility of getting shares is quite high in retail quota. One can make a maximum of five applications from a single bank account. It is advisable to make the highest number of applications from one bank account, with minimum lot size possible. This increases chances of allocation in case of oversubscription. Retail quota is at 35% in a book-built IPO. A confirmatory allotment note (CAN) is issued within six working days after the IPO process closes, in case of any allotment.

A Quick Recap

Identifying the right IPO is of utmost essence. You can do so by identifying your financial goals and time horizon.

You’ll also have to form an investment strategy. Understanding a company properly is an ideal way before applying for its IPO. Look at its financials, its future plans before putting your money in a company. You can find all these details in the prospectus. The prospectus is uploaded on SEBI’s website.

Once you identify the right IPO, you can make an online bid in two different ways — through your bank account or a broker’s website.

Read Full Article >
Enjoy Zero brokerage on ALL Intraday Trades
+91 -