Sharekhan Blog

All you need to know about Investments in IPO

  • Jul 25, 2023

Business prowess

Review the company's business concept, management qualifications, and past performance in-depth. The red herring prospectus is an excellent place to start when determining which IPO is the best to invest in. This is released by all businesses that are going public. Most of the data you require to assess the business is present. You can also consult the corporate website, annual report, and media publications. Only invest if you are certain that the firm has a solid business plan, sound finances, the capacity to generate income, and competent management. Additionally, take into account elements like the company's standing in its field and its distinct advantages over rivals.

Possibility of growth

A successful track record does not ensure a successful future for revenue development. The ideal IPO to invest in is one where the firm has the most potential for future development since stock values follow future growth. Assessing the industry's growth prospects can help you kick off your IPO investment investigation. Next, forecast how the firm's market share would increase over the next years. You may leverage variables like how much the firm invests in technology, how it fosters innovation, what it does to grow its market, and how it makes use of its strengths to its advantage. You may invest in the IPO if you believe the firm is performing well based on all of these factors.

Promoters' motives

Nobody wants to leave their company while it is successful and expanding. Therefore, before investing in an IPO, find out how much interest the promoter group is diluting. Promoter ownership must be at least 20% following an IPO, according to the legislation. However, owners of profitable businesses have often held far more. A promoter group may no longer believe in the firm if it is dramatically reducing its shareholding. It could also imply that they aren't interested in managing the business for a long time and won't give it their whole attention. It could also be complicit in criminal activity.

By observing what the management is taking from the business, you can immediately determine its aims. A corporation should be very wary about paying its managers to lavish compensation and huge dividends. especially if management is considerably reducing its interest in the company through the IPO. You should avoid dealing with such a business.

Use of the money

The red herring prospectus itself contains information on the intended use of the IPO funds. The greatest initial public offerings (IPOs) are those in which the proceeds will be utilized for growth-related expenditures, such as in new technologies, expanding into new markets, establishing new manufacturing facilities, or purchasing other companies. These investments have the potential to raise the company's income and earnings, which would raise stock prices and increase dividend payments. Make that the firm has a solid growth strategy in place and that the intended use of the funds is consistent with that strategy. The greatest IPOs might not be those whose earnings would be applied to old debts, unresolved claims, or working capital-related investments.

Pricing

Don't invest in an IPO merely because the firm is well-known. One element that sets apart the finest IPO from others is the company's brand name. Popular firms may oversubscribe for initial public offerings and price their shares more than they are worth. Competition analysis can be used to determine a stock's fair price. Two of the most popular multiples for this are price-to-sales and price-to-earnings.

These ratios may be calculated by dividing the stock price by the company's revenue per share and net income per share, respectively. The income statement for the firm includes both of these numbers. The stock may be expensive if these ratios are greater than those of the company's rivals. An IPO like that should be avoided. Of course, there are situations when the shares are more expensive because the business is superior to its rivals. You can determine if this is the case by carefully examining the company's past performance and potential for the future.

In conclusion

If you know what to look for, choosing the finest IPOs is not that difficult. Every time an upcoming IPO is announced, you may quickly turn to this investing advice for IPOs.



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