7 things to consider before investing in an IPO

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IPO - Initial public offering words written on the chalkboard

7 things to consider before investing in an IPO

 

Investing in an Initial Public Offer (IPO) can be a lucrative opportunity and at the same time the investor can be in a dilemma whether to subscribe for an IPO or not.

 

It is very difficult for a common retail investor to arrive at an intrinsic value of a stock before putting his money in an IPO. However, there are some factors that the investor can keep a track of which can very well prove to be fruitful in an IPO investment. Here are some key things that you should consider before subscribing an IPO.

 

#1. Stage of the Company

Prior to all the factors, one should keep in mind the stage of the issuing company and if the company is stagnant or is it in a growing stage. This will give you a sense of whether it is a good idea to put your money in the IPO. Generally, investing in an IPO of a company which is at the growing stage is good, as one should be looking to invest in a company which has future growth prospects. And so, if the company is growing, then the share price you will see few weeks after IPO may go up too!

 

#2. Existing Competition in the market

An intelligent investor will come to know the future prospects of a company by looking at its core competitors who are presently listed companies in a stock exchange.  One can come up with the stock price based on competitors’ stock price and then compare it with the price the company is issuing during the IPO.  This way one can come up with a fair valuation based on competition and can judge whether or not one should go ahead with the IPO.

 

#3. Utilization of the Proceeds

Before going to invest in an IPO, an investor should read the prospectus of the company carefully and should study all the necessary information mentioned there, investor should be aware of the purpose of the money and the planned utilization of the raised funds by the company. Once an investor is aware as to how the company plans to utilize the funds, it will give one confidence and clarity regarding if the funds raised will be utilized for the right purpose.

 

Also Read:

Understanding Basics of IPO – Initial Public Offering

 

#4. Past Performance

Company’s past performance is a clear indicator of how the company has performed over the years and is going to perform in the coming years. If the company’s growth chart is volatile, an investor should refrain from not investing in a particular company. However, if the company’s growth rate has been stable and growing over the years, there is a high probability that the company will perform well in the future.

 

#5. Management Analysis Report

No one knows the company’s insider info better than the management itself and the management discussion and analysis report tells the whole story about the company. One should read the report with caution and should take the less positive notes about the company very seriously. If the management says that the growth cycle will slow down in couple of years, then the investor should proceed with care before making an investment in the IPO.

 

#6. Investment Grades

A major indicator of investment in an IPO is the credit rating or the investment grades that the credit rating agencies give to an IPO before it is public as the analysis done by these agencies are a complete analysis of the company and the credit rating agencies have dedicated team of experts who work to the best of their knowledge to come up with an investment grade for an IPO. Generally A+ investment grades are an ideal IPO to be subscribed by the public which can prove to be a good investment.

 

#7. Other Avenues

Lastly, one has to have a complete look at their other investment alternatives that can provide them with higher and more worthy returns. It is not necessary to invest in an IPO as you always have an option to buy it from the secondary market so it’s good to evaluate other funds and stocks which may be safer and might give better returns than investing in an IPO!

 

However these are not the only factors that can be looked into before going to subscribe an IPO, one should trust the management and the company’s product more than the issuing price because if the company is fundamentally strong it can gain value on its share with can later on prove to be a good investment.

 

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