Investorline Knowledge Center - IPOs DOs and DONTs

IPOs DOs and DONTs

In equities, investing in a winning stock, ahead of everyone else, is said to be a sure shot way to riches. That's why initial public offerings (IPOs) are a craze with the investing public. Companies come out with IPOs either when they wish to raise money or the promoter wants to sell part of his shareholding. Companies that are already listed too come out with public issues, known as follow on public offers.

IPOs offer investors an opportunity to participate in the initial price discovery process of a company. Since a company is eager to make its issue a success, the pricing is generally kept attractive. Of course, there are times when companies try to make a fast buck by overpricing too. Since most companies keep the price attractive, investors in IPOs often gain immediately.

But listing gains, the premium at which IPOs usually quote at when they trade, should not be the sole motive for investing. Investors should only invest in those IPOs whose fundamentals are sound after considering all relevant factors. Merely investing for listing gains may find the investor holding shares trading at a discount too.

DOs

  • Ensure that you get a copy of the full prospectus and read it carefully before investing
  • Check the antecedents of the promoters and if they have other listed companies, check for frequent IPOs
  • Compare valuation with others in the industry, to make sure that it is indeed an attractive investment option
  • Ensure that in a book-built issue, you bid at the price you consider appropriate and don't get carried away by the hype surrounding an issue

DONTs

  • Fall prey to positive news announcements around the time of the IPO. These are usually meant to make the issue seem attractive.
  • Subscribe to an IPO if you find the price high, if your reasoning is correct, chances are that you will get it at a lower price in the secondary market
  • Invest in IPOs based on the current market valuation, while some premium is allowable to current market conditions, do not invest in a company you would not put money in a normal market

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