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How to analyse an IPO?

  • Mar 5, 2024

This cash is used to fund the current duties and fulfill the need to extend and increase profits. This also helps them with daily functioning making it a smooth process.

However, just having cash is not important. For expansion goals, we need investment in infrastructure and human resources as well.

In such a situation, the first choice is to take a loan. But various restrictions come with it like the requirement of collateral and high interest rates. That is when the second most used option becomes helpful, which is to raise money through an initial public offering.

What is an Initial Public Offering?

IPO refers to the selling of shares by a company to the general public. These shares were previously owned by a company and can be used to get money from it to expand their business. Once the entire process is done according to the IPO guidelines, the company becomes publicly listed with an allowance for trading in the open market easily.

How to Analyse an IPO?

How to analyse an IPO is as equally important as understanding investment. Here are some of the factors you must consider:

1. Understand the prospectus

Preparation of a prospectus is extremely important for any company that participates in an IPO. Without a prospectus, a company can't sell shares or securities of any kind.

Any potential investor, always asks for a prospectus first to understand the current position of the company assets. It provides details on the issuing company, market outlook, promoters, founders, and much more.

2. Gather information about the company's financials

This kind of data is the strongest indicator that helps an investor decide if proceeding with an IPO is a good decision or not. Increasing revenue and a continuously rising trend are super indicators of a growing company through which one can expect good returns. Having significant cash reservations and profitable growth along with low debt amounts are additive to the prospectus.

3. Determination of tolerance for risk

It is the most integral part of IPO investment strategy as here one has to introspect themselves. The hunger for risks and analysis of person-specific investment goals is important. Ask yourselves questions about the amount you wish to spend, and the time duration you have as limits.

4. Understand the purpose and need of IPO

The money provider, in their capacity as an investor, must understand the rationale behind a company's provision of such goals. This aids in conducting a background investigation as well as in comprehending the business's operations.

Growth is the primary motivator for most businesses to launch an initial public offering (IPO). Nonetheless, investing in companies that occasionally hold initial public offerings (IPOs) to settle outstanding debts and liabilities is not a wise decision.

5. An increment in public demand got an IPO

Following the crowd is not advisable at any cost when it comes to stocks or any kind of mutual funds. Understanding personal restrictions and ideologies is also extremely important. One of the best ways to decide this is to gauge it's demand. The relation between the two should be inversely related.

The more the demand, the more will be its price and might lead you to buy an overpriced share if not researched properly. Going for less exposed companies gives you an upper hand as an investor and will help you to make a proper decision.

6. Reviewing the financial valuation Ratio

The price at which shares are sold should be well comprehended by investors. This helps them to navigate through expensive, cheap or reasonably priced shares. To do this, there are various parameters one can assess easily. For example, debt-to-equity ratio, price-to-book ratio and returns on equity.  This diversification in knowing such details is extremely important as it helps to nullify the risks that one might have to incur.

7. Understand the reason behind why a company wishes to go public

This reasoning is extremely important to understand the basis of why a company would want you to buy a share. This reason for going public might or might not work in the favour of an investor who is looking for profits and hence knowledge about the same is extremely important.

The Bottom Line

IPO is an interesting and highly profitable market to invest in. If one acquires the methods of formulating an IPO investment strategy, it is a never-ending chain of continuous money profits. Participation in such procedures initially might be challenging but with continuous hit and trial methods of learning it is possible to get great financial kick-starts from it. This industry is pretty well known but requires patience and in depth knowledge to stand a fair chance of making money. Since money is taken into consideration here, one is always advised to keep one's goals and appetite for high income under control. This will ensure relief from unnecessary losses that might need to be incurred. 


Team Sharekhan
by Team Sharekhan

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