Here’s How To Navigate IPO Effectively Through Public Listing

Initial public offerings (IPO) are increasingly being leveraged by new-age entrepreneurs and a more aware public as a must have tool. But today the focus has shifted a bit, rather than trying to capitalize on a stock's initial bounce, they are more inclined to carefully scrutinize its long-term prospects.

Participating in an IPO

An IPO is a medium that gives the public an opportunity to own and participate in the growth of a formerly private company. The general public can invest in two ways in a new public company -

First, by virtue of being a client of an underwriter involved in the IPO, they can help you in purchasing the shares at the offering price. With this, you can increase the chances of directly buying most of the shares in the popular IPOs, such as mutual funds, hedge funds, pension funds, insurance companies and high net-worth individuals.

Sidhavelayutham M, CEO & Founder, Alice Blue

The other way is well suited to individual investors, in this they purchase the shares when they are resold in the public market in the days following the IPO. To buy shares in this way, an investor could submit an order to their broker.

However, knowing how to navigate the IPO world is equally important, so below are some of the tips that an investor should consider -

Read the prospectus

The prospectus is filed by a company with SEBI and briefly summarizes all the information including the company’s business, strategy, plans for using the funds raised in the IPO, financial condition, and terms of the IPO itself. It's a blueprint of how the company wants to use the public money that will be raised, and what are the possible risks for investors. Thus, before investing in the IPO investors must go through this document.

Pick a company with strong brokers and analyze risk factors

One thing to keep in mind before investing in an IPO is that big names on the list don't always mean big returns. Instead, go for companies that have strong underwriters as while selecting smaller brokerages, there are more chances that they may be willing to underwrite any company. It is also beneficial to identify the risks that can significantly impact the company’s business, operations or performance, or an investment in the securities being offered.

Know the Business

One should know the company’s lines of business, its principal products or services and their markets, any significant suppliers and customers on whom the company’s business depends, and its competitive landscape and principal methods of competition, among other matters. As understanding the magnitude of the opportunity and the company's work know-how can make a whole lot of difference when it comes to growth and shareholder returns. And if companies are hesitant to show all these activities then investors should steer clear from buying their IPO.

Market overhang or Await Lock-Up Period To End

In the lock-in period, investors are restricted from receiving or selling their investments; however, once the period is over they are allowed to sell their investments. Additionally, when the lock-up agreements expire, a large number of shares become available for sale all at once at a much lower price which allows early investors to sell their shares which they weren’t able to do earlier.

The Bottom Line

Globally, when IPO values are nosediving, India’s IPO market is still standing firm and is continuing to offer an exciting option for investors looking to enter the market. Big names like Paytm, Bajaj Energy, Nykaa and LIC are already a big hit in the sector. So if you’re interested in the exciting potential that the IPOs are offering then keep in mind that investors who put their fingers on the pulse are likely to see their holdings perform much better than those who are ill-informed and unaware.

When it comes to buying IPOs, investors should have a clear horizon. They should be aware whether they are investing in a quick profit on a listing day or want to hold the shares for longer. Additionally, investors should prefer a more diversified, lower risk approach to funds that offer exposure to IPOs and diversify their holdings by investing in hundreds of IPO companies.

Sometimes IPOs can present great opportunities to buy a share at a bare minimum price that one can call a steal, so if investors ever come across such an opportunity they should surely make use of that. However, investors should make a decision depending on how much risk they can take and if it is in sync with their financial goals.

(The author of the article is Sidhavelayutham M, CEO & Founder, Alice Blue)

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