IPO: The Indian stock market has been flooded with Initial Public Offers (IPOs) in recent times. Stock indices are trading at their all-time high. To take advantage of this market boom, more IPOs are expected to come. Investors are also ready to make money through these IPOs, although new investors need to keep some things in mind before investing in these IPOs. It is important for new investors to be very careful while investing in IPOs, as many times such investments can carry more risk than you anticipated.
What is IPO
An initial public offer is made by a private company to raise capital from the market. It is the process of converting a private company into a public company. When companies need money, they list themselves in the stock market. The company spends the capital received through IPO according to its need. This fund can be used to pay off debt or for the growth of the company etc. Listing of shares on stock exchanges helps the company to get a fair valuation of its value.
It is important to note that not all IPOs get the success they want. There have been many IPOs in the past that did not succeed while many others performed very well and added to the wealth of the investors. Therefore, it is important for investors to have a good understanding of it before investing in any IPO. While investing money in IPO, it is important for investors to keep some things in mind, which we have told here.
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Read the DRHP carefully
Through the draft red herring prospectus or DRHP of a company, that company can be understood. This document is presented to the market regulator SEBI, which contains important information related to the company. It contains information about the company’s business, past performance, assets and liabilities, details related to utilization of funds received through IPO and possible risk factors that may affect the performance of the company. You should read it thoroughly before deciding to invest. DRHP provides many important information, with the help of which you can understand the business of the company better and take investment decision based on this.
Objective of capital raised
It must be taken into account where the funds raised by the company are to be used. If the company is burdened with debt and mentions in the DRHP that the proceeds will be used to pay off the existing debt, then investors should be more careful in investing in it. However, if the fund is to be used for the mixed purpose of growing the company as well as repaying the debt, then the investment can be considered. If the company is already performing well and wants to use the funds received from the IPO for the growth of the company, then investing in it can prove to be a profitable deal.
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Know the Promoters
The people who are running the company should be kept an eye on them. This includes the promoters of the firm and other key management executives. Whether the company will grow or not depends largely on who are its promoters and key executives. All business decisions of the company are taken by him. An investor should take into account the number of years the key management executives have spent with the company.
Learn about the company’s business and its expansion
Factors such as the company’s position, market share, reach of its products, geographical spread, expansion plans, projected profits, supply chain, crisis handling capacity, etc., need to be taken into account in the sector the company belongs to. On the basis of all these variables, it can be estimated whether the company will grow in future or not.
Know about risk factors
The company tells about the risk factors in its DRHP. An investor should read it carefully. These are the things that depend on whether investing in this IPO will benefit or harm. There can be a variety of risk factors including legal litigation, policy related changes and interest rates. This can affect the future growth prospects of the company.
Like any other investment, it is important to assess your risk appetite before investing. You should invest according to your risk appetite. If the business looks too risky as advised by the market participants and does not match your risk appetite, it is better to avoid investing in IPOs.
(Article: Adhil Shetty)
(This article has been written by the CEO of BankBazaar.com.)
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