Following a slowdown in the primary markets, fundraising through Initial Public Offerings (IPOs) is expected to rise once again amongst ongoing concerns of higher interest rates and recessionary pressures amid surging inflation. The second half of fiscal 2023 is likely to witness a sharp rise in the IPOs in India. Nearly 10-15 companies are expected to raise more than Rs. 20,000 Crore through IPOs in the second half of fiscal 2023.What is an IPO? An IPO is typically an offer through which a company decides to go public and lists its shares on a stock exchange. You can open Demat account to begin your journey into the stock markets. Investing in an IPO can be highly profitable as certain stocks, as they get listed, may witness a sudden spike in prices, enhancing your portfolio in a short period. However, investing in a particular IPO may not be that simple. Let us understand the primary elements you must consider while seeking to invest in an IPO.
Strong Fundamentals –
Make sure you have strong fundamentals before investing in an IPO.
1. Draft Red Herring Prospectus (DRHP) –
The Securities and Exchange Board of India (SEBI) mandates every company to file a draft red herring prospectus. Understanding this document helps you gain insights into critical information about the company, such as the financial information, company’s management etc.
2. Promotors –
A crucial factor while looking for IPOs is to check who the promotor is. Recognized names bring more credibility to the table and inflate stock prices.
3. Business –
Invest in the company only if you understand the business.
4. Grading –
It is crucial to understand the grading of an IPO. A higher grade is typically considered a positive indicator.
5. Objective –
Understand the purpose of the IPO, such as how the company intends to deploy the funds. This could help in estimating the time frame and results.
You must also understand the basics of the Demat account, such as how it works, Demat account charges etc. before you begin your investments.
Understand your risk appetite –
Before you decide whether or not you want to invest in an IPO, you must understand how much risk you are willing to take. Investing in an IPO carries some risks, such as:
a. Getting less than the offered rate –
When you purchase pre-IPO shares, you risk receiving less than the invested amount. The actual price of the shares is determined only after they are listed, and that price can be less than the initial purchase price. In such cases, you may lose out on the principal amount.
b. Multiple variables influencing profitability –
As you buy pre-IPO shares of companies with different backgrounds, not all of these would give good returns since the price is influenced by various factors such as past performance, the industry’s fragility, and the performance of an affiliated company etc.
c. External factors affecting prices –
Companies may conduct business in areas where government legislation plays definitive roles. If you purchase pre-IPO shares in such companies, you enter an uncertain territory since legislation may not be in your control.
You can ask yourself a few questions, such as would it be alright if the value of your stock fell by more than 50% the following day? Why do you want to invest – are you looking to mint quick profits, or do you want to invest for the long run? What percentage of your portfolio would you like to allocate to IPOs? You will understand how much risk exposure you can take as you answer these questions.
Although IPOs offer an excellent platform for investors to profit, they also carry substantial risks. Make sure you understand the company’s business, promotors, and grading, in addition to assessing your risk appetite before making an investment decision.