How to find a good IPO to invest in?

Deepika Chelani
Updated: 14 Dec 2021, 03:24 PM IST
TL;DR.

Before investing in a company's IPO, it's crucial to look at their business strategies, finances, management stability, and historical success. Invest only if you're confident in the company’s potential to grow. Let us understand the entire process of finding a good IPO

Investors can easily find a good IPO by closely reviewing the company's management credential, business model and historical performance.

Investors can easily find a good IPO by closely reviewing the company's management credential, business model and historical performance.

Initial Public Offering floods the stock market, which creates a panic among the investors as the decision of investing in a particular company becomes difficult with so many options. Here are some pointers that can be kept in mind while evaluating companies for investing in their IPOs.

Business Strength

It is considered important to go through business models, finances, management stability and previous performance of the company before investing in their IPO. Every company who plans to go public issues a red herring prospectus which can be beneficial for the investor to know about the company a little better.

Invest only if you’re convinced that the company can be trusted and have strong attributions for the upcoming future. Research about a company's position in the market and future endeavours can also influence the decision of the investment.

Company with Strong Brokers

Investors should be extra cautious while looking out for brokerages, try to look out for companies who have strong underwriters. It is often said in the stock market world that quality brokerages are likely to go for quality.

Investors need to remember that smaller brokerages will be willing to underwrite any company. Good big companies do not allow the investor’s first investment to be an IPO, usually who get IPOs are long-standing and high paying players of the stock market.

Promoter’s Intention

It is always important to see how much stocks are being diluted by the promoter’s group before investing in the IPO. If the promoters are diluting their stocks often it can infer that they have less confidence in the company or have thought of shutting down.

A management’s intentions can be judged by looking at what they are drawing from the company, if the company is giving fat remuneration and large dividends to its management, then there is a point to suspect about.

Be Cautious

Scepticism is always appreciated in the world of stock market and while deciding which IPO to invest in. It is necessary to be cautious while investing in an IPO considering the uncertainty is high in stock market and the level information is less and difficult to understand by a lay-man.

It is also important to note that an average investor doesn’t usually get IPOs for good companies as brokers pre-save those lots for big players, so the research about companies should take place accordingly.

Pricing

Brand name of the company does not always can be a distinguishing factor for selection in IPOs. A lot of times big multinationals over-price their stocks making the investor reconsider their decision of investing in the particular company.

To estimate the price of the stock, competitive analysis can be done. Price-to-Sales and Price-to-Earning are the commonly used ones. But it is also true that some companies over price their IPOs as they are genuinely better than their competitors. A thorough research of the past and the future endeavours can tell a lot about this perspective.

With technologically friendly resources picking, tracking IPOs has become an easy task. It can be concluded that investors with sceptical thinking and a knack for research have proven to be successful in the field of stock market and choosing the appropriate company for the IPO.

 

First Published: 14 Dec 2021, 03:24 PM IST
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