When a private company decides to go public, it launches an Initial Public Offering (IPO). It gives you a chance to make quick money, as successful listings often see a sharp rise in stock prices. However, there are instances when IPOs fail miserably post-listing and result in heavy losses. This proves that you cannot invest in any IPO blindly because every IPO has different growth potential.
So, how can you find the right IPO that’s worth investing in? Let’s break it down.
Understanding IPO types in India
In India, two primary types of IPOs exist:
1. Fixed price IPO
The issuing company sets a predetermined share price before the public offering. When you apply for the IPO, you know the exact price. This method is simple and transparent but does not consider demand. Hence, there are chances that stocks may be overpriced or underpriced, which may affect returns when traded on the stock market after listing.
2. Book building IPO
The issuing company provides a price range rather than a fixed amount. You place bids within this range and have to specify the number of shares you want and the price you are willing to pay. The final share price, known as the cut-off price, is often decided based on demand.
How to choose the right IPO for yourself? Quick tips
Before you hit the “Buy IPO” button on your demat account app, consider these important factors:
Always read the prospectus
The Red Herring Prospectus (RHP) is a document that every company issuing an IPO has to file with the Securities and Exchange Board of India (SEBI). It is publicly available on the SEBI website, company websites, stock exchange portals, and registered intermediaries.
This document is the best source for information about the company and its upcoming IPO. It includes details about the company's background, business operations, financial performance, strengths, risks, and the IPO itself. It also explains how the company plans to use the funds raised. As an investor, it is advisable to always read the prospectus to understand whether you should buy an IPO or not.
Assess the reasons behind an IPO
A company can issue an IPO for various reasons. Some prioritise expansion, debt repayment, research, or mergers and acquisitions, while others focus on raising working capital for daily operations. If a company is planning to use IPO proceeds to repay debt or fund other non-growth-related expenses, it could signify financial pressure.
Don’t get influenced by public demand and market trends
Always remember a golden rule, i.e., never follow the hype blindly. Just because an IPO is heavily subscribed doesn’t mean it will definitely be a great investment. High demand can sometimes be driven by speculations, media coverage, and short-term trading interests.
Look at the business model, financial stability, and industry outlook instead of relying only on the subscription numbers. A company with strong growth prospects and a clear vision for its funds can be a better investment than one riding on temporary market buzz.
Invest in an IPO smartly
IPO investments offer a great opportunity to make quick money, but the key is to choose the right one. So, make sure to read the RHP thoroughly, understand why the company is going public, and analyse its business, financials, industry trends, and valuation before investing. Remember that public demand and hype should never be the sole deciding factors.
Once you find a promising IPO, you can place your bid online easily through a reliable trading app like MO Riise by Motilal Oswal. Simply open a demat account, select "IPO" from the available options, choose an IPO (current or upcoming), enter bid details, and approve the UPI mandate. Start exploring IPO opportunities today!