IPO or Initial Public Offerings is
the biggest buzzword in present day stock markets. Form beginners to
professionals, every investor nowadays want to take part in an IPO event and
buy shares. A small piece of statistics can prove the craze for IPO events.
In the year 2018, Indian stock
markets saw a capital-raising of whooping $5.52 billion from 161 IPO offerings. The number
is on the rise in the year 2019 and it will continue to increase. With too many
IPO offerings in the market, new investors often get carried away and can’t
find a suitable IPO offering for them. Here are some suggestions for them to
pick the best among all the offerings.
Know about the company
This is mandatory for every
investor before opting for an IPO event. Go through all kind of information
available about the company, the IPO of which attracts you most. Learn
thoroughly about the business model, financial health, revenue potential,
management policy and credentials, historical performance etc. of the company.
You can learn all these
information from red herring prospectus which every company provides while they
are performing an IPO event. But, many think that the prospectus provided by
the company itself contains exaggerated information. So, better option is going
for the company’s website, annual report and media reports.
Don’t confuse company’s financial
health or strong track record with anticipated growth potential. An excellent track record
even sometimes doesn’t promise excellent growth in future. Again, a company
having poor financial health currently might promise better growth potential.
Wiser decision is going for the company that promises excellent growth
There are some specific parameters
to estimate the growth potential of a company. Before jumping onto the company,
find out the potential of the market and the industry in which the company
falls. If both of them are growing, go for the company evaluation. You can look
for the factors like the company’s appetite for expansion, how much it is
trying to expand, how innovative the company is, its use of technology etc.
Combining all these factors, you’ll find a concrete picture of the growth
potential of the company.
Another good strategy to choose a
good IPO is to look for the exit. Nobody usually wants to leave a company if it
is doing profitable business. According to market law, promoters have to hold
minimum 20% shares of the company after an IPO event. Naturally, if everything
is fine, promoters hold way more than that. So, if the promoters are releasing
their hold to the minimum limit, it means the company is going through bad
You can also compare the amount of
dividend given by the company to its management and the investors. If the
management is getting way more dividend than the investors, it is highly likely
that the company has some issues. Don’t opt for these IPOs.
Use of the money
Another effective strategy to
choose among several IPOs is learning about the sectors where the raised
capital will be used. Every company provides a red herring prospectus during an
IPO event. You will find all the information about how and where the money
raised from IPO event will be spent.
Many companies raise fund for
repaying old debt and settlements and making working capital related
investments. Don’t participate in the IPO events of those companies as you
might find out they don’t have an organized future plan for growth and might
not make your good return.
Rather, go for those companies
which intend to spend the money raised from an IPO event in expansion of the
company, acquisition, adopting new technology, expanding the production
facility and catching new markets. These companies clearly have organized future plane and
The last thing you need to keep in
mind while choosing an IPO event is price ratio. Don’t assume that shares with
higher price are better or the shares of famous companies are usually
overpriced. Of course shares are sometimes overpriced when the company is doing
extraordinarily well. But, this isn’t the case always. If the company’s past
history and overall financial health is good, a bit of higher price is ok.
But, if the result of a company’s
history research is negative, take assistance of valuation multiples like Price
to Sales and Price to Earning ratios. These ratios will let you know if the
share is overvalued from its intrinsic value. Don’t go for an IPO event which
is issuing overvalued shares.