Companies launch Initial Public Offering (IPO) whenever they want to raise the capital that they need to expand their businesses or diversify their operations.
Subscribers directly buy the share from the company and become a part of the business and earn profits as the share price increases.
You may think of earning gains by investing in IPOs but there are certain things if you ignore may lead you to a loss-making investment waste.
You can make IPO a profitable investment by taking care of these 5 things before investing in IPO.
#1. Always Read Company Prospectus
You may not like reading this lengthy document providing IPO launching company’s financial details. But if you manage to do this cumbersome task, you have won half of the game.
The company provides all the crucial information about company’s business, capitalization, accounting details, management, and financial data that an investor requires to make an informed decision. According to personal finance expert Pardeep Goyal, select only the companies that you understand and invest in business that will keep making money even in the recession.
Give close attention to the company’s accounts to understand the profit-making capabilities of company in the future. That would give you the confidence about that IPO.
#2. Do a Deep Research
The company launching IPO provides important details in its prospectus. You might be relying on that only but it can still be biased. Because the company may provide you limited information.
You can see the exact picture only if you do your deep research about the company launching the IPO. You can try to get all the information about the company’s financial status, accounting details, competitors and similar stuff.
You can access different portals that provide IPO insights, you can track the company’s past record and analyze its’ competitors.
You should also check the valuation of the company status by comparing with existing competitors. You can inspect technical factors like Price to earnings ratio, price to book ratio and return on equity for better decision making.
This will help you understand how the company will behave in the future. YOu can decide whether the IPO is worth buying or not.
#3. Check Promoter’s Background
Checking the promoter’s background is very crucial. You should research whether the company’s promoters are buying or selling their shares.
Because a higher promoter’s stake in the company indicates that the promoter’s confidence in the company’s future growth.
You can understand the company’s overall position by examining the past records of promoters.
There could be chances that the promoters have raised money in the past and then cheated the investors. So always read the offer document carefully to avoid such companies.
You should avoid such an IPO where the management is poor despite the lucrative offer. You may end up losing money.
Always look for companies whose promoters have transparent management.
#4. Analyze the Utilization of Funds
The main key point to avoid any wrong investment call is to understand how the company is going to utilize IPO funds.
Check the financial health of the company, whether the company is going to utilize these funds to repay its debt or it’s going to invest in the expansion of the business. You must avoid it in the former case.
If a company has a vision for business expansion or development in new areas, such IPOs can be your choice.
#5. Choose Broker Carefully
Choosing the right broker or underwriter is a serious thing. You may get a cheap broker that can end up investing in your hard-earned money in a low-grade company.
Cheap broker doesn’t mean a bad guy at all. You must be cautious about the scheme proposed by your underwriter.
Check the broker’s market goodwill, how much efficient his research is and whether he is concerned about your investment or his brokerage.
Your IPO investment must be based on your investment goals and your risk-taking capacity. The third is your understanding of the business in which you are gonna invest.
Avoid going for the hype in the market. Be cautious, do your own research and then make an informed decision.