What is the IPO investment strategy
IPO or Initial Public Offering is a fresh issue of shares for the first time to the public by a company. IPO is either a fresh issue of shares or an offer of shares by existing shareholders of the company to the public. IPO launch is step where a private company takes a step towards converting itself to a public company. A public market opens tons of opportunities for investors and for the company. Stock market is a game of highs and lows and if someone wants to stay in such game for a longer period of time then they must know and remember the following strategies.
Do a deep research
Acquiring information about private companies which are on the verge of becoming public is little tough as the private companies do not need to disclose all their informations and they tend to hide sensitive information from the public as many public companies have many analysts hovering them trying to expose cracks in their functioning. There might be many experts who do not do a deep research into the financials and internal workings of a company but one must do all the research possible from our end. The company does release their prospectus but it will surely not contain every fair and dirty business of the company. We should try and find as much information we can about the company online, and by its competitors, past news highlights, financing, including overall industry terms. Learning about the bits and pieces of the company is an important step before putting your money in risk.
Go through the company’s prospectus
One of the important steps before IPO investing is reading the company’s prospectus. When you buy an IPO in any company you become a part of the company so you should be aware what kind of a company you are a part of and you do not have safety of capital like debt investors. So its advisable to go through the red herring prospectus in detail so that you have the knowledge of how your money will be utilized by the company. You can acquire the prospectus of any from the company’s website, SEBI website, Stock Exchange website and newspapers and magazines. After reading the prospectus you will be able to understand the reasons why the company is going public, the past of the company, the number of risks involved in the company, details of the board of directors and promoters also what the company is planning to do with your money and much more.
Select a company which has strong brokers
As IPOs are managed by brokers we can rely on them. But this doesn’t change the fact that big/strong brokers don’t underwrite poor companies its just that the ratio of poor companies is very less compared to best and quality companies. Big brokers have built a fame which they care for and will prefer underwriting IPOs of fundamentally good companies. Mostly strong brokers are more likely to get associated with strong companies. You should be extra conscious when you prefer relying on small brokers as they are easily convinced to underwrite for any company.
Be aware of where your funds are being invested
Any red herring prospectus will only inform you where your funds are used but knowing precisely about them is important. If the company decides to pay back for its liabilities then is a red signal, but if the company is trying to raise capital for growth and research then such investment becomes a green signal for your funds, time and effort.
Be aware of your surrounding news
Conjecture in the IPO market is a must which also helps you analyze your decisions carefully. There is always uncertainty revolving around IPOs, most due to insufficient information which is why approaching with awareness is a safe way. If a broker is consistently presenting any specific offer then there might be something you are not aware of and you are likely getting the leftover that the big money didn’t need or want and there is always some hidden reason behind these offers.
Valuations are important
It becomes quite difficult for retail investors to discover the precise valuations of ant private company. When investment bankers and underwriters are trying to explore the correct valuations based on returns and management, you should try and set up some valuation benchmarks to determine the company and its competitors along with its operations.
Hold up till the lock-in period
A lock-in period is a legal agreement between the underwriters and insiders which does not allows investors from selling their shares of stock for a specified period of time between three to twenty-four months. So after the lock-in period ends and if the underwriters start selling then it means that the prices will fall and they are not sure about the company’s future. Also if underwriters keep the shares after the lock-in period ends then it is a good signal as they show trust in the company’s future prospects.
Prepare an exit strategy
It is an important step for short-term investors and you need to decide till what degree you will sell off your shares and count in your profits. Many a times shares of good companies list at top levels and then after a period of time they fall over. You should pre decide your exit plan before your start investing. And figure out your loss levels and all IPO investment might not give god returns, setting up stop loss and booking profits is advisable in IPOs.
To sum up
IPOs are an important and profitable way for private companies to raise capital but not every company is raising capitals with a faithful mind. So, the money your earned with your sweat and hardwork should not be utilized to pay off debts, which makes it important to analyze before investing. Also you should look for unbiased opinions of others or of brokers. You should invest in IPO only when you want to don’t try and follow the herd and don’t believe a third party’s theory, create and rely on your own strategies. You must listen to everyone but you should only take such steps suit your risk taking capacity and your appetite.