There were days when investing in an IPO would be a sure shot lottery for the investors. This was the phase when the market was booming and achieving new highs each day. Most of the IPOs listed used to give out great results making huge 1st day gains. However with the markets taking a toll and witnessing an economic slowdown the case was never the same as before. The tech bubble upon being busted brought about the change in the trend which the IPOs had actually developed. So expecting to get twice or thrice the value of investments from IPOs was no longer the case. However IPOs are still one of the best bets to start off in the stock market being a safe investment option.
The moment you plan to invest in an IPO there are few vital points which should keep in mind which have been discussed below:
Conducting research on the concerned company is difficult
For the new companies which offer their IPOs and are about to go public it is very difficult to get the relevant information concerning them. Compared to the publicly traded companies there are no reports or analysis which could help you know the possible flaws the company may have. One would say there is a prospectus which the company releases along with their IPO, but the fact that it has been prepared by the company itself could well point towards any biasness which the prospectus can have.
The best thing to do in this scenario would be searching the internet and getting information regarding the company. It could involve the competitors, or the finances, even the press releases which the company had made in the past. Moreover you might not find enough which could make you confident enough to believe in the tall claims of the company but a little knowledge as well as a research before you invest in the company could be the best possible thing you could do. On many occasions a research may yield that the prospects along with the overhyped abilities is much lesser than what the claims are.
Select the company with a strong broker
One important thing to look at is the weight of the underwriters. A strong underwriter behind a listing is always a welcome making the release much reliable and stronger. Involvement of big banks, along with big brokers increases the reliability and prospect of a listing.
On the other hand a small positive of the involvement of smaller brokers is that they can help the investors in getting the pre-IPO shares if required.
Going through the Prospectus in detail
Reading a prospectus is very important even though most of us would say relying blindly on the prospectus is not appreciated. However as it contains all the risks and opportunities the company seeks to have it gives a broader picture of the direction which the company might move in future. It lays out the places where the money raised would be utilized. For example if the company is generating money to invest and expand its operation then the investment looks lucrative. However in a situation where the company would use the money raised for repaying its debts or buying shares from the promoters then it would not be advised as a good investment option.
With all the precautions and the related things mentioned above most of us would agree that IPO is one of the best means to accumulate stocks of prospective companies which look to expand and grow in the near term. Usually after investing in an IPO and remain invested in the company for years surely means you would be among profits as the company grows and expands operations. Thus the only thing to be kept in mind while dealing with an IPO would be being skeptical and informed investor so that you perform much better than you would have done with the already existing stocks in terms of a long term investment.ADVERTISEMENTS