Understanding the stock market can be quite difficult for many beginners. We already learned about the IPO, its pros & cons, and How to apply for and IPO online. Now we are trying to provide a few guidelines to beginners to help them take right decision while purchasing IPO. These guidelines contain some of the most common Do's and Don'ts of buying IPO shares.
As a beginner, you should invest your time to study the market, inspect the behavior of the stocks, and take notes about different strategies of the companies that impact the share prices. If you take the right decision, you can make a lot of money in a very short period of time by investing in IPO. Tactful and timely decisions in the stock market can help you fetch very good returns from your investments, though that period may be either short or long depending on the equities you purchased. So let’s dig into the core part of the discussion do's and don'ts of buying IPO stocks.
Do’s of Buying IPO Shares:
I know you are what you are :). But while investing in stock market, it is extremely important for you to talk to yourself and know the real intention behind your potential investment. If you have been closely researching the company’s growth, or if you are familiar with the sector in which the company deals in, or if you can read the company’s future growth potential and your substantial returns over a period of time - then you all set for this new investment.
Open a Demat Account:
For an investor to apply for IPO shares, he should have a valid and verified Demat Account. Without a Demat account, you cannot buy or own any shares. It is fairly easy to open a demat account and can be opened in any of the registered Depository Participants (DP). In India, you can open with any DP registered under NSDL or CSDL. You can open a Demat account with zero shares, and later buy shares when you wish.
[Read More: What are NSDL & CSDL? Which One is Better?]
Open a Trading Account with Online Trading Facility:
To trade stocks online you need to open a trading account with any registered stockbroker who provides online trading facility. Online Trading is lot more convenient and saves time. But one thing to remember that, NOT all the discount brokers offer the facility of Applying IPO. Hence if your goal is to buy IPO then check the facility with the broker. Your trading account will be linked to the bank account and you can transfer money to and from those accounts as per your requirement.
[Read More: What Are Trading and Demat Account? How to Open One?]
*Note: In case you are buying stocks from US or UK, you only need Brokerage Account. Check out How to Open a Brokerage Account.
Do Through Background Check of the Company:
If you are planning to invest in the IPO of a company, do proper research. Check the company background, check who is underwriting the IPO, any news or events that are published in newspapers or in any trusted financial websites etc. Also, you need to carefully scrutinize the data on the IPO details which is provided in the offering prospectus. If possible, try to get the information that how the IPO price is evaluated.
[Read More: How is The IPO Price Determined?]
Know the lock-in Period:
IPOs are usually offered with some pre-defined terms and conditions that you need to agree before buying. One if the most common term is a Lock-in period. It is a defined time period which restricts the people, who have received IPO shares, from selling their shares on the stock exchange. Be sure to check the lock-in period before investing.
Market Trends and IPO Performance Are Related:
Often new investors don't consider the market trend before investing in IPO, though they are tightly related to each other. The market trend depends on numerous individual factors and involves stocks from various sectors. Before buying an IPO you should fundamentally analyze the trend of the sector in which the company is working into. Sectors that are presently in fundamentally strong position is bound to do well in the bullish market and can become your helpmate to make quick money.
Don’ts of Buying IPO Shares:
Don’t Bite Off More Than You Can Chew:
This common phrase is one of the ultimate guidelines in view of stock market investment. The decision of investing in IPO stock is indeed a very risky job, as the stock market is quite unpredictable. So, take some time, judge your capacity of taking a financial risk, and assess yourself on the maximum limit of loss you can accept on your investment. Over-excitement is the biggest enemy in stock trading, so never cross the border in an excitement of buying IPO.
Do Not Borrow Money for Investment:
Ensure that you do not borrow money from anyone to invest in an IPO. Returns from IPO investment is not anywhere guaranteed. In case of any misfortune, the money you are investing can shrink to a tiny amount. Moreover, the loss would be accompanied by the interest rate that you have to pay on the borrowed money. Or in case of borrowing from relatives, the good relationship between you and them may end up. So, only invest the money you have, and more specifically invest a maximum of 25% of your unutilized money for investment.
Big Backers is Not Equal to Big Returns:
While taking decisions on buying IPO, don't get tempted by looking at the big names shown as the list of investment banks or major stockbrokers backing the IPO. They may have a completely different perspective or calculation behind their backing decision. You should ignore these type of company provided facts and figures in the prospectus and focus only on financial report for judging the growth potential before investing in IPO.
Don’t Fall For the Hype:
Remember that the company which is issuing IPO shares along with its investment banks have also put in a lot of money into the process of IPO. They will be trying to fully utilize the opportunity to market it like a piece of diamond. This often includes creating hype through social media, or sometimes you may also get SMS from unknown sources describing a potential price increase of that share. My suggestion for you is to do your own research and take the decision only if you are sure about growth potential.
Hope you have enjoyed the above article on the do's & don'ts of buying IPO shares. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments if you have any questions about applying for IPO stocks. Also l, t us know your experience of investing in IPO.