Top Tips for Navigating the IPO Market as a First-Time Investor

Last Updated on January 4, 2024 by BFSLTeam BFSLTeam

An IPO or an initial public offering is the first time that a private company offers up its stock to the public. After an IPO is offered and shares are allotted to subscribers who bid for them through an application, the company gets listed on the stock exchange. 

The IPO craze reached a fever pitch in the days of the “tech bubble” in the 1990s. At the time many people invested in IPOs and earned big returns, at least, in the initial period after an IPO was launched. The tech bubble soon burst and the IPO market was back to normal. Nowadays, many IPOs are coming out, and if you are on an IPO watch, you may find IPO investment lucrative if you invest with care. Today, however, instead of expecting quick returns out of any IPO, investors delve into a company’s long-term prospects and then invest if they think the future is potentially positive.

Be on the IPO Watch – Participate in an IPO

If you’re a first-time investor, sifting through the vast IPO ecosystem may confuse you. If there are so many out there, how do you choose which one you should invest in? The first (and most obvious) thing to do is find a private company about to go public. Companies like this are not hard to locate as any upcoming IPO is advertised in newspapers and the media in general. Furthermore, if you have signed up with a brokerage, you will get notifications of future IPOs easily. Banks also know about upcoming IPOs, and investment firms do as well. 

To participate in an IPO, you should be on an IPO watch. India has many IPOs that come out on a monthly basis. Nonetheless, before you dive into IPO investment, you should know how to find your way through the IPO market and make informed decisions about investing. Some useful tips may do the trick to guide you on your way. 

Additional Read: Upcoming IPO in January 2024

Tip #1 – Start with Research 

Getting proper information on private companies going public may be a challenge. Unlike many publicly listed companies, private companies do not have crowds of analysts and experts covering them. Analysts attempt to uncover any potential cracks in a company’s corporate armor, thereby letting investors know exactly where a company stands in terms of many factors like its performance and financials. Although most companies attempt to completely disclose every bit of information in their prospectus, this is written by them and not by an unbiased third party.

Along with your IPO watch, it’s a good idea to search for any information you can about the company, its competitors, past media releases, financing, as well as overall industry health. You can easily do this online.  Learn as much as you can. This is crucial to know what you are getting into with your investment. 

Additional Read: Why do companies go public?

Tip #2 – Select a Solid Underwriter 

Try to select a company that has a strong underwriter. Companies of a potentially high standard may have underwriters that are solid, as against those that are lesser-known. For instance, if Goldman Sachs has opted to underwrite for a company, then it’s

Tip #3 – Read the Prospectus Thoroughly 

Although you may not rely only on the prospectus of any upcoming IPO, you should still make it a point to scan it thoroughly. It may make dry reading but you can get an in-depth picture of a company and its past performance, financial data, and the reasons for the IPO. Furthermore, you may view a highly positive future prospect, but this could be a red flag that the company is portraying just to get people hooked on the IPO and craving for market success. 

Tip #4 – Act with Caution 

If you wish to invest in an IPO, scepticism will get you everywhere. It is good to ask relevant questions about the IPO, have doubts, and then look for answers. This means that you are on the right track where information seeking is concerned. Additionally, if investment bankers, brokers, and other professionals are trying to over-recommend an IPO, you should consider why this is being done with so much enthusiasm. One scenario could be that the IPO may not do too well with high-end investors like institutional investors, high-net-worth investors, and other high rollers so it’s being handed out to retail investors. 

Additional Read: IPO allotment process

Tip #5 – Wait for the End of the Lock-In Period 

If you are on an IPO watch, India has a lot to offer with IPOs from different industries and sectors available to investors. Nonetheless, however tempting an IPO may be, it is better to do some due diligence research before investing. Something to consider in any potential IPO is the lock-in period. This is a legally binding contract between any company’s underwriters and the company. It may last anywhere from 3-24 months. This contract prohibits all investors from selling shares allotted through the IPO for the specified period in the contract. 

If you wait for this period to end and see if high-end investors or insiders sell or hold their stock, you get an indication of the stock’s strength. For instance, if insiders continue to hold the stock even after the end of the lock-in period, it could imply that the stock potentially has a bright future. 

Lines to End With

Several successful companies may go public to expand their operations and raise capital with an IPO. If you are on an IPO watch, it is essential you consider important parameters of any company so you can easily sift through the vast number of IPOs launched. Consider keeping your fingers on the pulse and use scepticism to raise doubts and resolve IPO-related questions. 

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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only.