Selection of the Best IPO for Investment

Selection of the Best IPO for Investment 

The year 2020 was famous for multiple reasons, however, the most alarming ones include firstly due to covid 19 pandemic and secondly due to the flood of IPO which hit the secondary market.

   In this digital age, there are several companies led by first-generation entrepreneurs which are doing extremely well within the country and globally, after establishing themselves in the primary market, they are eying to expand the product line further and establish a footprint worldwide. To do so huge capital is required and for that public participation becomes mandatory. That's why these companies are jumping into the sea of the stock market with the intention of making a big name. There was a time in the 1990's when investors /Participants  used to  experience huge first day listing gains, and huge long term gains also. But nowadays all companies hitting the market with ipo are getting listed at premium valuation with very less scope of future gains.  Most of the IPO subscribers nowadays also get disheartened with their IPO prices going to read the very first day or when it takes a downhill path in the long term. one can easily make out from  these situations that there is no sure short way of making money from the subscription of every IPO . Hence, finding a good IPO which is getting listed at correct valuation is a paramount important factor for generating money from initial public offerings. It is difficult to shift through the riffraff and find the IPOs with the most potential, but certainly not impossible. A good IPO investment has certain traits. If you can get most of it right in the IPO you are planning to invest, then your chance of getting lucky is more. So, here are some IPO tips one must follow before subscribing to it. 

1. Objective Research

If you are thinking of doing objective  research by yourself, mind you it is not an easy task to discern the correct and accurate information about the company likely to go public . Unlike listed companies which are extensively covered by various analysts, very little information generally remains available in public domain for the unlisted companies hence it is a herculean task to obtain the correct financial health of the company. Though companies are supposed  to disclose  the information in the Red Herring Prospectus , we have to understand that it is prepared by the company itself and they always try to shield the grey areas . The 3rd party websites may have been compromised to give biased views and the investment banks and brokers will have their own vested interests to portray the company they support in a good light. So what IPO subscribers should do..?

So, the rule is, look for the inclination of  anchor investors before it opens for subscription. Do not hurry to subscribe to the IPO on the very first day. Wait till last day and look for the subscription of IPO in (QIB) Qualified institutional Buyers category , If it is over subscribed, then you can trust that IPO, because the Institutions have better penetration into the Company's internal  data than the retail individual investor. And you can be sure that the institutions will not put in their money where it won’t grow.

2. Leafing through the Prospectus

As discussed above the companies try to conceal the non favourable information from coming to the public domain while filing for IPO. However, information divulged in the prospectus is generally correct. So it is always advisable to pursue the prospectus as it provides the glimpses of possible risk and opportunities associated with the comapny.

3. Credibility of the Broker/Underwriter 

Companies always choose underwriters very carefully based on certain criteria

However, If the underwriter is a big investment bank like Goldman Sachs or

Morgan Stanley or any big investment bank they generally would not like to

associate their name with the company which has undisclosed issues.  so if the

investment bank which is helping the company in bringing the IPO into the market

is strong and has a proven track record . Then chances are bright the IPO will be

worth buying.

4. Invest at cut-off price

As you know the IPO always comes with a price band the lower price is called the floor price and the upper price is called the Cut- off price. If you are a retail individual investor and you are keen on increasing the chance of getting shares allotted then bid at the cut-off price. It will increase the chances for your application to be considered, whatever may be the final allotment price.

5. Look at the valuation

Valuation is the toughest parameter to conclude for the retail investors. This process is extremely technical. The investment bankers and under-writers judge the quality of management and returns before arriving at the final offer price. Compare the valuation of the IPO in India in the secondary market with a listed peer based on sector and the ratios then it will help you to decide should you subscribe the IPO or give it a miss.

6. Select a good broker

Opening a Demat account with a good and famous brokering house sometimes assists you to get the allotment in the most-sought after IPOs which are quite hard to get. There are brokers or  IPO portals that can open the door to new and interesting IPO stocks. They may have enough connections to ensure decent allocation for you.

7. The Bottom Line 

Successful companies regularly go public but finding the apt opportunity and valuation is a tedious task. But it is wrong to say that all IPOs should be avoided, though. Some investors who bought the stock at the IPO price have been rewarded handsomely by the companies in question.

Just keep in mind that when it comes to dealing with the IPO market, skeptical investors with their fingers on the pulse are likely to see their holdings perform much better than those who are trusting and ill-informed. So be informed and make the right decision based on all the above-mentioned parameters. Finally,  I will conclude by sayings 

“ Moneywise be Wise “