How to Invest in an IPO
An initial public offering or IPO is the process of offering shares of a private company to the public or other investors by issuing new stocks. The investors who participate in the IPO get an opportunity to buy the shares of the company before it is listed in stock exchanges and made available to the public. Through the IPO the company will be looking at raising significant capital for growth and expansion or paying off existing debts or both.
Why Should You Invest in IPO
- Investing in an IPO is a great opportunity for a retail investor to own a small portion of a company.
- By investing in an IPO you may be getting the opportunity to invest in a business with huge potential at a relatively early stage or in a well-established highly reputed company with a great outlook.
- By participating in an IPO you have a good chance of getting IPO allotment possibly at a discounted rate.
- IPOs of good companies are a great opportunity for good appreciation of your investment and long term wealth generation.
Things to do before investing in IPO
How do you take the decision to invest in a particular IPO? This is a significant question. The IPO could be for a company with a good reputation with a long history or a relatively new and unheard of company with huge potential. Hence thorough research on the company, its history, background, risks and opportunity is necessary before investing in the IPO.
Refer to the Red Herring Prospectus: The Draft Red Herring Prospectus or the DHRP contains detailed insight on the company issuing the IPO.It contains information on the company’s business, financials, past and current performance, and its positioning in the industry and among competitors. The document also elaborates the reason that the company is raising the funds for, objectives and goals, risks and opportunities, etc. So the DRHP is a good starting point in your research on the company.
Understand the Business, its risks and opportunities: Understanding the business of the company along with the risks and opportunities is an important step in deciding whether to invest in the IPO. The companies will make their business along with the risks and opportunities clear in the prospectus, but it is important that you understand the industry or sector, the product, services, competitors, markets, future prospect, etc. Special attention must be given to the risk factors and the opportunities that is mentioned by the company and compare it against what you have identified from your research. This gives a good idea about the future of the company and what to expect from your investment.
Company Management and Capital Structure: Before you invest in an IPO you must take a closer look at the people who are running the company. Learning about the original promoters, current directors, managers, the shareholders, and level of ownership of management personnel who are key players in future of the company is important. The presence of well-known investors or directors is encouraging signs. Employee options and performance shares in the company may have some effect on your investment in the longer run. All these are important factors to be considered while making your decision.
Financial Health and Valuation: You should take a close look at the financial performance of the company. You need to check if the revenues and profits have been growing or falling, how the company has used available capital, and whether there are debts. Investor should also know how the company is valued as it may be overvalued, undervalued or fairly valued. You can look at the valuation of similar listed companies from the same sector for a comparison.
Utilization of Funds: Animportant parameter is how the company utilizes the fund raised from the IPO. The company plans to use the funds only for paying off debts, then investing in the IPO is not a good option. But if the company plans to utilize the funds partly for paying off debts and partly for expansion and growth, or maybe even fully into expansion of business, then it means that the funds are well utilized and you as the investor will also benefit in the long run.
How to Invest in IPO
The process for investing in an IPO is not a difficult one. The process can be summarized as follows:
- The foremost and the most important part is where you finalize your decision on investing in an IPO.
- A demat account is a prerequisite for investing in an IPO. If you do not already have a demat account, this is where you open one. You can select your depository participant, which is a brokerage firm like Nuuu or a financial institution of your choice and open one easily. You could consider opening a trading account also.
- Decide on how many shares you want to buy and how much you want to spend on the IPO. Ensure that you have sufficient funds in the bank account linked to the demat account. If you do not, then arrange for the necessary funds.
- You can now apply for the IPO. This can be done online using the mobile app from Nuuu or through our website. You can also apply by filling in the physical application forms.
- You can complete the application process by completing the fund transaction procedures with the bank.
- The shares will be allocated to you and credited to your demat account.
Points of Note:
- The Price Band is the upper and lower limits of price at which the investor can bid for an IPO. The underwriter analyses the forecast, industry, economy and many other factors related to the company to set a price range at which the shares can be sold. This price range is known as price band.
- ASBA or application supported by blocked amount is a payment method for IPO. Once the investor has applied for the IPO, the equivalent amount remains blocked in the investor’s bank account that is linked to the demat account. Once the shares are allotted, the amount is debited from the account and shares are credited to the demat account.
- One person/investor is allowed to make only one bid for an IPO even if the investor has more than onedemat account with different DPs. If more than one application is made with the same PAN number, all the applications for the IPO under the PAN number will be canceled.