We know that there is no certain way to gain money in the stock market. But Here we have come up with ten solid and proven tips for investing in IPO and to increase your chance of making profits. Every year, numerous companies are releasing IPO with an intention to take advantage from the stock market and getting big. But it not always goes right for everyone.
Sometimes people may witness huge long-term or short-term gains, and sometimes get disheartened when first IPO price drops to the bottom.
Finding a good IPO share is truly difficult, but certainly not an impossible task. There are certain steps to be followed for getting a good IPO investment deal. If you can get most of the things right while planning for IPO investment, then you will have a good chance of getting lucky.
Tip 1 - Check The Past Performance Of The Company:
Before you invest in a company's IPO, do check for the historical performance of the company year by year. If the company's yearly revenue is growing around 20% each year, then it can be assumed that the firm is growing well.
Also, compare the company's performance with the average performance of the sector in which it belongs to. If the performance of that company is lower than the industry average, then the company is considered to be an underperformer. In that case, you should look for other better companies to invest your money.
Another important thing is to check for any sudden increase in company's revenues before the launch of IPO. In that case, those IPO stocks are better to be avoided.
Tip 2 - Choose a Company That is Backed by Strong Brokers:
Strong brokers and underwriters always help bring quality companies to the public. You have to be more careful when choosing companies that are supported by smaller brokers. However, one advantage investors can get with small brokers is that they have a relatively smaller client base and this makes it easier for an individual to invest in the pre-IPO shares. So, do your own research before investing in IPO. See our guide on choosing the best stock broker.
Tip 3 - Evaluate Background Of The Promoters:
This is one of the most important factors that have to be checked before investing in an IPO. You must check the background of the promoters of the company and evaluate the experience they have. You must also check if the company has any payment defaults to any banks as the performance of the promoters would surely impact such a default in payments.
Tip 4 - Evaluate Future Plans of the Company:
Read the prospectus carefully and also do the market research to know how the company is planning to use the raised capital. The plan of action may contain launch of new products, expanding the business to a different sector, improving their infrastructure, or paying off the debts, any of these or a combination that may have a potential to generate good revenue. If everything looks promising, then you can think of buying that stock.
Tip 5 - Look at the Interests of QIBs and FIIs:
Being as general public you won't have much access to the company's inside data. So, it’s not much possible for you to deeply evaluate the company. To overcome this situation you must try to figure out the interest of QIBs and FIIs on that particular IPO.
The golden rule is, if the QIB category is over-subscribed, then you can trust that IPO. Because the Institutions have better access to the Company data than the retail individual investor, they can better judge the company prospects. And you can rest assured that those institutions will not put their money in a company with limited growth potential.
Tip 6 - Fill-out The Application Form with Every Single Detail:
At the time of filling out the IPO application form, fill in each and every detail they have asked for. Incomplete application forms may get rejected instantly. Nevertheless, if you miss filling out an ECS refund, you may not be able to avail the facility of the easy refund into your bank account.
Tip 7 - Invest at Cut-off Price:
If you are a retail individual investor and you want to increase the chance of getting shares allotted, then bid at the cut-off price. This way your application will be considered, irrespective of the final allotment price.
Tip 8 - Verify the Valuation of IPO:
Determining the value of IPO is the toughest thing to conclude for retail investors. This process is extremely technical and needs some mathematical knowledge. One of the easy methods for evaluating the IPO price is to look at the share price of any peer company listed on the stock exchange.
[Read More: How the Value of IPO Calculated?]
Tip 9 - Look at the Operating Ratios:
Before putting your hard earned money into an IPO investment, check all the common operating ratios. Some of the ratios to look at are Price to Earnings Ratio (AKA P/E Ratio), Price to Book Ratio, and Return on Equity.
Tip 10 - Always Wait Beyond the Lock-in Period:
IPO generally includes a term called Lock-in period. It’s the time within which no one is allowed to sell the IPO stocks to secondary market. The duration of lock-in period can be anything from 1 month to 2 years. Within this time, the stockbrokers or the underwriters are also not allowed to sell their shares.
Wait and watch for some time after the lock-in period gets over. If you see that the brokers or the underwriters are still holding their part of company shares, then you can be sure that the company is going in the right direction and you have a good chance to grow your money.
Above are the 10 golden rules you can follow to increase your chance to get the IPO allotment and make handsome profits from investing in the IPO Shares.
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