Initial Public Offering (IPO): 10 Things to Check Before Investing
With many IPOs lined up in the coming months, it’s crucial for investors to understand what to check before investing in an IPO.
Table of Contents
What is an Initial Public Offering (IPO)?
Initial Public Offering is a process in which a company offers its shares to the public for raising funds.
In an IPO, both institutional, as well as retail investors, can participate and for this reason, Initial Public Offering investments are keenly watched by investors.
The stock’s price is determined by the issue sale during the IPO which may either go up or down and it depends upon the investor interest in the company’s stock.
Key Terms Used in an IPO
- Abridged Prospectus: A summary of the IPO prospectus, highlighting key features.
- Draft Red Herring Prospectus (DRHP): Submitted to SEBI 21 days before the IPO, detailing the company’s plans for the raised funds and potential risks.
- ASBA: Ensures investor funds remain in their account but are blocked until shares are allocated.
- Red Herring Prospectus: Provides comprehensive details about the company, including business operations, management, future plans, and IPO pricing.
- Price Band: The range within which investors can bid for shares.
- Book Building Process: Determines the IPO issue price based on investor bids.
- Offer Date: The start date for bidding on IPO shares.
- Lot Size: The minimum number of shares one can bid for.
- Minimum Subscription: The minimum proportion of shares that must be subscribed for the IPO to proceed.
- Floor Price: The lowest bid price for shares.
- Issue Price: The final price at which shares are allocated to investors.
- Cut-off Price: The minimum issue price at which shares are allotted.
- Oversubscribed: When bids exceed the number of shares offered.
- Oversubscription: The excess amount raised in an oversubscribed IPO.
- Underwriter: Investment bankers managing the IPO and book-building process.
- Listing Date: The date when IPO shares begin trading on the stock exchange.
10 Things to Check Before Investing in an IPO
- Read the Red Herring Prospectus: Understand the company’s plans for the raised funds and assess potential risks.
- Understand the Reasons for Fundraising: Determine how the company plans to use the funds—whether for debt repayment, business expansion, or other corporate purposes.
- Comprehend the Business Model: Ensure you understand the company’s business model and its market opportunities.
- Analyze Management and Promoter Background: Investigate the qualifications and experience of the company’s promoters and management team.
- Assess the Company’s Strengths and Weaknesses: Perform a SWOT analysis using information from the DRHP.
- Evaluate the Company’s Valuation: Compare the offer price with industry standards and financial ratios.
- Examine the Company’s Financial Health: Review the company’s financial performance over the past few years.
- Define Your Investment Horizon: Decide if you are investing for short-term gains or long-term growth.
- Compare with Peer Companies: Analyze the company’s valuations and financials against its peers.
- Gauge the Company’s Market Potential: Assess opportunities and threats within the company’s operating sector.
Bottom Line
In addition to these factors, conduct your own research. If you believe the company has strong growth potential, consider investing in the IPO. Remember to invest based on thorough analysis, not just on grey market premiums.
Happy Investing!