Lately, India has seen an increase in the number of Initial Public Offerings (IPOs).
The reasons? Well, you have many. Some can include the rapid economic growth, coupled with the rise of many new companies and project requirements.
Speaking of 2024, it has been the year of IPOs. Why? Believe it or not but over ten startups from the country went public this year.
Yes. You read it right! This year has been that exciting when it comes to IPOs in India.
These companies have managed to raise billions for the Indian economy, securing the country’s position on the global innovation and entrepreneurship map.
But what are IPOs, how are IPOs issued, how do you evaluate an IPO, and what are the potential risks involved in IPO investments?
If you have all these questions in mind about IPOs, you must read this blog.
What is an IPO?
IPO is Initial Public Offering, which by its name, signifies a process where private companies and firms sell their shares to the public for the first time to raise equity capital from the public investors. With an IPO, a privately held company goes public, which means it becomes a public company.
Investing in an IPO can benefit you in different ways, including the following.
- Early investment opportunity to tap into the country’s rapid growth prospects
- Potential for promising returns
- Diversification
- Shares at a discounted price
These benefits drive many new and experienced investors toward investing in an IPO.
However, with so many of them coming up, how do you choose the right IPO for your money? Here are some generic tips to help you assess a company’s IPO.
Want more insights into IPOs? Consider understanding the mechanics of IPOs and how they help companies and investors.
How to Evaluate an IPO?
Informed decisions matter in the stock market. And more so when you invest in new companies as they do not have a history of stock performance, returns, etc.
Thus, before you invest in an IPO, here are some essential factors to consider.
- Company’s Business: Understand what the company sells and how relevant it is in the current and future context. Look for companies that sell products, solutions, or services that people would need in the long term.
- Evaluation: Assess the company’s market position, management team, business prospects, upcoming projects, target markets, etc., to understand its promise.
- Company’s Financials: Deep dive into the company’s historical and current financial reports, P&L statement, balance sheet, and IPO pricing compared to its present financial position to evaluate its financial health.
- IPO Prospectus: In addition, check the company’s IPO prospectus, which includes the reason for raising the IPO and various other important details.
- Risks: Furthermore, identify and understand the risks involved in investing in a particular IPO. Look for the company’s market threats, competitor strength, etc.
- Expert Advice: Also try to get expert advice on investing in the IPO. Follow experts, news, updates, and opinions on investment banks underwriting the IPO.
The IPO Listing Process and SEBI’s Role
SEBI is the regulatory body for the securities and commodities market that establishes and enforces rules and regulations for companies to follow. Before issuing an IPO, companies must be approved by the Securities and Exchange Board of India (SEBI).
IPO issuance undergoes an extensive process that involves various steps including,
Hiring an Investment Bank
Companies seek guidance from underwriters or investment banks to begin the IPO process. These experts study the company’s current financial position and plan to serve its financial needs. They sign an underwriting agreement with all the IPO details.
RHP Creation and SEBI Registration
The company and the underwriters file the registration statement with the Draft RHP comprising the company’s financial data, industry and business details, management information, probable price estimate per share, risk reports, business plans, etc., per the SEBI Act and Companies Act.
Further, it declares how it will use the funds from the IPO. Then, the underwriter and the company submit the documents to the local ROC (Registrar of Companies) a minimum of three days before they open the offer for the public bidding.
Stock Exchange Application
Then, the company decides on the stock exchanges where it will list its shares and accordingly apply there.
Do a Roadshow
Before going public, the company’s executives travel across the country to market the upcoming IPO. The purpose is to inform potential investors about the company’s financial position and create a positive sentiment.
Price the IPO
The company then prices the IPO based on whether it wants a Fixed-price IPO or a Book Bidding Issue. In the fixed price method, the underwriter and company fix a price for their shares. On the other hand, in the book-building method, the company and underwriter fix a price band the investors can bid in.
Go Public
The company makes application forms available on a planned date. People can get them from any designated bank or broker firm. Once the details are filled, they can submit them online, or check as well. SEBI has a fixed availability period for an IPO to the public, which is generally five working days.
Risks of IPO Investments
IPOs carry various risks as well. Let’s look at some of them.
Overvaluation: Sometimes IPOs are priced too high, leading to poor returns. As an investor, you may have to pay a premium based on the hype.
Market Sentiment: The stock price may be driven more by marketing and hype than the actual value, causing sudden price drops.
Limited Company Information: IPO is the first time a company looks to raise public investor money. Such companies obviously won’t have historical stock trends, patterns, returns, etc., for investors to review.
Liquidity Risks: Newly listed stocks may have low trading volumes, making it harder for investors to buy or sell shares without impacting the price as much.
IPO Underperformance: IPOs may underperform in the long run than established companies.
IPO Investment Strategies
Here are some strategic tips you must follow before investing in an IPO.
- Conduct extensive research about the company
- Compare the IPO price to its competitors to know if it is overvalued
- Refer to the IPO prospectus for all the IPO information
- Evaluate the market sentiment
- Assess the lock-up periods
- Avoid getting carried away by hype
- Refrain from following crowd behavior
- Know who are the IPO’s underwriters
- Prepare for volatility
- Consider long-term investment prospects based on your research and understanding of the company
Conclusion
As more companies apply for IPOs, investors are likely to have more IPO investment opportunities in the future.
However, one cannot discount the importance of evaluating a company’s financial health, prospects, and growth before investing.
While this applies to each investment, IPOs have unique risks like overvaluation and market hype associated with them.
Hence, investors must research and ensure they make informed decisions.
Of course, doing so requires you to know how to research, conduct technical analysis, and more. One of the keys to doing it is pursuing stock market classes in Pune.
This is where Wealth Note steps in.
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