Beginners guide guidelines before investing in ipos

Beginners Guide: Guidelines before investing in IPOs

Introduction •

IPO has become the buzz word in the past two years in India, with top companies such as ICICI Prudential, BSE, and D-Mart going public, it is raining IPOs at the Indian bourses. One of the most interesting ways of entering the Indian stock markets, over the past two years, IPOs have become a very popular addition to an investment portfolio. Here are 5 guidelines that you need to know before investing in an IPO:

Clearly understand IPO as an investment asset class • Before investing in IPO, it is important for you to gather information about IPO as an investment asset class. IPO is a mechanism used by private companies to offer their shares to the public by getting listed on a noted stock exchange such as the BSE (Bombay Stock Exchange) or NSE (National Stock Exchange). Post IPO, the company’s shares will be traded publicly in the stock market. It is important to note that private company through the IPO is offering small part of ownership stake in its company to the investors up to the extent of shares subscribed through the IPO.

Research the company floating the IPO •

Since you would be investing your hard-earned money in a company’s IPO, it is vital to gather information on the company’s business prospects, the overall industry scenario, and other key business factors and study them carefully before investing. This would help you take a well-informed decision to invest in company's IPO. You will get a clearer picture of the RoI.

Understand why the company needs funds • Any private company going public through the IPO needs funds for specific purposes such as business expansion, product diversification, increasing production capacity, funding working capital requirements, and repayment of debt. Once you know the funds requirement, you will be able to understand the company’s profitability after the allocation of the funds procured through the IPO.

Study the company’s profitability prospects after the IPO •

It is crucial for you to know the impact of a company’s decisions pertaining to use of IPO proceeds such as business expansion, product diversification, increasing production capacity, funding working capital requirements, and repayment of debtor overall profitability. For instance, if the company plans capacity expansion, it is important to know how and to what extent the additional capacity would generate incremental revenue and profits. In case the company wants to use IPO funds for repayment of debt, you need to understand whether that would reduce the debt-to-equity ratio of the company. If IPO proceeds are used for funding working capital requirements, you must assess how that would lead to improved operational efficiency in the long-term.

Read about some successful IPOs in 2016-17 •

Some of the most successful IPOs in the last two years include ICICI Prudential, BSE, and D-MART with NSE SBI Life all set to go public. It is important to read more on these successful examples to understand how they were successful and why they were oversubscribed.

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