Things To Keep In Mind While Investing In IPOs In 2021

Things To Keep In Mind While Investing In IPOs In 2021

Ever so often, companies require working capital to expand their business and diversify their product suite; an IPO is a way to secure this capital from investors. By the sale of the shares or equities, the capital secured is then utilized in business expansion, reducing or eliminating debts, and facilitating easy trading of existing holdings, amongst others.

Things To Keep In Mind While Investing In IPOs

Here are a few things that investors should keep in mind before investing in an IPO in 2020.

• Understand your Investor Profile and Objectives

It is essential to be familiar with your risk profile and the reasons behind investing before you take the plunge. When a company goes public, there is a lot of publicity and hype around the same, which often leads to investors rushing to subscribe. Many investors cite reasons such as peer recommendations or simply the fear of missing out on the opportunity to buy low as the reasons to subscribe.

• Research Well About The Company

When it comes to stock investing, the ability to conduct deep research about the business you are looking to invest in, no matter how arduous it may seem, is the right approach. Download the company prospectus from its official website or even from the SEBI website and thoroughly read it. Take help if you are not able to understand certain terminologies, but don’t skip over sections. The prospectus contains information about the company’s financial performance, the reason behind issuing an IPO, the details about the promoters, dividend policy, offer information, details about the management, statutory disclosures, and regulatory information etc.

Also Read: Why Should You Invest in an IPO?

• Utilization of the proceeds

It is highly essential that you check how the proceeds secured from the IPO will be used. If the company says only debt, will be repaid, then it is not such an attractive option, but if the company says that they will partly pay a debt, open a new factory or general corporate purpose, then it shows that money will actually flow in the business which is good for an investor.

• Take A Look At The Valuation

This may look tricky for retail investors but is an essential aspect that should not be overlooked. To begin with, see how the valuation of the company fares as compared to existing companies in the same industry. You can employ techniques like Price to earnings ratio, price to book ratio, and return on equity judge better.

• Understand That Backing Doesn’t Translate To Guaranteed Results

It is very common for investors to base their bets in an IPO based on the esteemed list of promoters, major stockbrokers backing it. Moreover, their reasons could be based on different calculations and this does not translate to guaranteed returns. You should base your decisions only on your research and analysis of the company fundamentals and growth prospects before taking a call.

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