You must have heard many times that a lot of companies are now ‘going public’. This means to expand their business, the company goes to the public to raise funds and make investors their shareholders. So, an Initial Public Offering or IPO is the journey of a company from being privately held to becoming a publicly traded entity.
Let’s delve deeper into this topic to understand its meaning, the benefits of investing in an IPO and the common strategies involved.
Understanding Initial Public Offerings (IPOs)
An initial public offering is raised when a privately held company offers its shares to the general public for the first time and becomes publicly traded.
When a company issues an IPO it means it is inviting the public to invest and become partial owners of the company through the primary market route.
For example, ABC Ltd is a thriving technology company in India which decided to offer an IPO through the stock exchange. General public and institutional investors can access details of the initial sale of shares through the prospectus and decide whether to invest in the IPO. The listed stock of ABC Ltd. is ready for trading in the secondary market.
Benefits and Risks of IPO Investing
Investing in an Initial Public Offering can be a great way to boost your portfolio, but it must be done only after due diligence. Let’s look at a few benefits and risks of investing in an IPO
- Chance to earn huge profits: When a company decides to issue an IPO, it usually utilises the funds to expand. Typically, the growth of a growing company is more rapid than the established ones. Investing in an IPO means entering the company at the growth level and witnessing fast growth in the near future.
- Enjoy price transparency: The IPO order document mentions the price of the security. So, similar to bigger investors, you get access to all the information, including price, before investing. The scenario changes once the company becomes public.
- Meet long-term goals: Since IPO investments are equity-based, they have the potential to earn huge profits in the long run. Hence, just like equity investments, ensure you stay invested for a longer duration to reap benefits and achieve your long-term financial goals.
Strategies for IPO Investing
IPO investing has become a popular choice for investors. However, finding the most potential upcoming IPOs in India is the key to success. Here are a few tips and strategies for investing in an IPO in India.
- Do your research: When you plan to invest in an IPO, understand you are investing in a private company which is planning to go public. Private companies typically do not have strict disclosure norms. Thus, researching about them is more difficult and essential.
- Read the red herring prospectus: Every company issuing an IPO must file a red herring prospectus with SEBI. The prospectus contains complete details about the company’s background, financials, strengths and risks, and other information about the IPO.
- Invest in IPOs with strong underwriters: IPOs are backed by brokers. Hence, look for IPOs backed by reputed and big brokers.
- Learn and invest at the cut-off price: You have to bid a price within the price band for investing in an IPO. Hence, learn about the cut-off price and bid according to at least get your application considered for final allotment.
- Know about the lock-in period: Underwriters usually have a contract for holding shares (known as the lock-in period), after which they may start selling. This may lead to a fall in share prices.
Conclusion
IPO investment can be a thrilling experience as you get to participate in a company’s growth from its early stages. However, researching well and understanding the terminologies can help you make informed decisions for investing in upcoming IPOs in India.
