IPO Investment Strategy: Last year, 14 stocks out of 15 major IPOs are currently trading above their issue price in 2020. Some stocks have given 200–400 per cent returns. Apart from this, 11 of these stocks have been giving profits to investors since the day of their listing and 6 stocks have given more than 70% returns on the first day. Despite all this, the decision to invest in an IPO is not easy. As attractive as an IPO can be, the risk factor associated with it is also something that investors should be careful about. Based on key factors like better research and monitoring of QIB participation, investment in IPO should be decided so as to get better returns.
Important things before investing in IPO
1. Detailed Research
An IPO is issued when a company is listed on the exchange for the first time and only after that, companies have to submit a report of their key financial data every quarter. Financial status of the company is not readily available before listing. The data that the company gives in the draft Red Herring Prospectus (DRHP) for the IPO is made by the companies themselves for the purpose of raising funds. No fair market unit prepares this draft. In such a situation, maximum information should be gathered about the company, its promoters, their criminal record (if any), financing, competitors, media coverage and its industrial activities.
2. Focus on Values
To get allotment, most investors do not pay much attention to the value of a company or its fundamental analysis. Apart from DHRP, investors do not have any specific data to analyze about the company. However, despite this, the sector whose company is, can study other companies of that sector and analyze the values. The biggest problem in this is when the company that brings the IPO is the first of its kind, then it becomes difficult to do competitive analysis.
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3. Monitoring QIB participation
The Qualified Institutional Buyers (QIB), the IPO issuing company, makes special pitches. QIBs are SEBI-registered financial institutions, banks, mutual funds and FIIs (foreign institutional investors) who usually invest money on behalf of others. The future performance of a stock is judged by QIB’s investment, ie how much the stock is subscribed to by QIB is judged by how much better the stocks are for investing. However, one should not rely solely on this figure as the QIB may also have its own pros and cons. Last year, the only shares of companies listed below that are currently trading below their issue price in 2020 have been oversubscribed nearly 10 times by QIB.
4. Best study of DRHP
All the IPO companies have to tell their business operations, revenues, assets, liabilities, market landscape as well as how to use the funds raised from investors in DRCHP. Investors have to give information about everything so that they can take the right decisions. Studying DRHP will help in making investment decisions. Pay special attention to how the company will use its funds along with the company’s prior performance. If the company is aiming for R&D or business expansion, then it is a good sign as it can make future growth possible. Conversely, if the company has targeted to pay liabilities through the fund, then the balance sheet of the company and its stake in it should be studied in more detail.
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5. Technique advantage
Take advantage of technology to reduce the possibility of any mistake in IPO and in-depth analysis. There are investment recommendation engines in India that analyze more than 100 million data points and put forward benchmark results. They also provide advice related to IPOs. They can help in which IPOs to participate and in which not.