4 Golden Rules for Investing in IPO’s
An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company. Bull run markets are always favor the companies lining up for IPO’s. But there are many factors to consider them before investing in them.
During this bull market there are many IPO’s were launched with higher valuations and they are higher than the listed peers. However only few companies manages to beat the index in 3 – 5 years time frame. Many gets listed with Big Bang premium, but underperforms after that.
Investment Bankers advise companies to list their IPO’s when the markets are high, after a strong quarterly result. Timing of the IPO’s are another important factor. Investors must be careful not to pay higher price for recent and short-term performances.
- Ask yourself, why you want to invest in this IPO – Is this for Listing Gains or as a long term investment. With this approach you will know when to exit.
- Don’t fall for hype, IPO’s are always look like an opportunity of a hot cake in demand, do read the recent prospectus for their Balance Sheets and look out for Profits, Turn over and Revenue.
- It is important for investors to look at the subscription by qualified institutional buyers for the IPO, as that gives an idea of the quality and pricing of the issue. While a very low level of subscription would mean institutional investors do not see the issue as a strong proposition.
4. Compare the issue Valuations, PE Ratio and Book Value with existing listed peers in same category, this will give you an idea, whether the issue is rightly priced or overly priced.
Understanding the IPO is always fiddly for many beginners. When you follow these criteria, the decision to invest or not will become easy.
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