The year 2017 was the best year ever for the IPO market. In 2017, Companies had raised Rs 1,61,116 Crores through Initial Public Offerings (IPO). This is the highest amount ever raised in a calendar year. The year 2018 looks even more promising.
As IPO's are part of the equity market, they are subject to all risks that equity shares face. So before investing in an IPO, investors should consider the following factors.
1. Go through the prospectus of the Company
A prospectus is a document provided by the Company, which contains information on the Company and the purpose for which funds are being collected. It is very important to read the prospectus, before investing in the IPO. Prospectus also contains information about company’s financial reports and its past performances. Going through the prospectus will help investors decide, whether to invest or not.
2. Do a background check on the company
To check a company's future vision, you need to know its history and how the company is currently operating in the market. Investors should also track the financial performance of the company in the past three years, along with the management decisions executed by the company.
If management decisions are executed in the proper manner, it means the company has a bright future. So it's always a good idea to run a background check on the company.
You should have detailed knowledge on the IPO and how the company is going to use the money that is being raised. If you are unable to understand the Company's line of business, you must take the services of a professional, who will give you an idea on the advantages and disadvantages of the investment.
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4. Look at the valuation
Before investing your money in the IPO, you should compare the valuation of the company with a listed peer in the secondary market. In case, the company is new to the market and has no listed peers, you need to use simple valuation techniques like price to earnings ratio, price to book ratio and return on equity.
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5. Invest with a long-term perspective
You might feel listing gains are attractive. But you get true returns, only if you stay invested in the Company for long periods of time. Some companies do not give attractive listing gains, but might do well in the future, if the fundamentals of the company are really good. So don’t focus only on listing gains.
Take a look at the best IPO of 2017, Apex Frozen Foods, an exporter of shrimps in India. Investors have got more than 380% since its listing in September 2017. Though the initial demand was not very high, just look at the returns.
6. Check if the IPO has been delayed
In the IPO market, companies are known to delay their IPO. It is possible that a company is just waiting for market conditions to improve, or the volatility of the market to reduce. But, if the IPO has been delayed by the company many times for some other reasons, you should invest in such an IPO, only after knowing the proper reason why the IPO has been delayed, so many times. You should also check the company’s performance during the delay.
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