How to Select a Good IPO?

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The IPO buzz in the financial world may have caught your attention, but what is an IPO and what benefits does it provide investors? In addition, if you are planning to invest, it is imperative that you know how to analyze an IPO. Don’t worry, we are here to help you.

Let’s start with – What is an IPO?

An initial public offering (IPO) or also referred to as a stock launch, is the first-time public offering in which shares of a company go public and are offered to both retail and institutional investors to subscribe or purchase. The company’s shares get listed on a recognised stock exchange for the first time, referred to as the primary market.

After an IPO is successful, the shares of the companies are freely traded in the stock exchange, referred to as the secondary market. With IPOs making all the important headlines and flooding the equity market, investors like you are showered with many IPOs to choose from.

On that note, let us understand and analyse how to select a good IPO that fetches you a healthy return on investment.

  1. Always Advisable to read the Red Herring Prospectus

It is imperative to say that a good IPO always comes with a fair, transparent prospectus. Whenever a company seeks to raise equity in the form of an IPO for the first time in the financial market from investors, it has to file the Draft Red Herring Prospectus or DRHP and send it to the market regulator. 

You must be aware that the Red Herring Prospectus explains in detail how it intends to use and allocate the proceeds raised through IPO and also mentions the risk factors that investors like you should be aware of. Thus, it is always advisable to thoroughly review the prospectus before investing. You should read each detail to understand the IPO.

  • Understanding the business model at the outset

Before subscribing to the IPO, you must understand the company’s business model, industry, and sector. It is also important to understand the nature of the business. A cyclical company is bound to be impacted and hit by changing business cycles like recession, increasing inflation, etc. However, a stable and mature company sees less impact on changing business cycles.

  • Know how the company plan to use the money raised

As an investor looking to invest in an IPO, it is your hard-earned money, and you have the full right to know and question how the company will utilise the proceeds raised from the IPO round. A company may raise capital to pay off its existing debt, or it can also raise capital to fund its expansion and growth stages. A company seeking to expand and grow has a higher chance and probability of fetching excellent returns on your investments. A good and promising IPO is always transparent and fair for its investors.

  • Look into management team and promoter profile

It is imperative for you to know and understand the promoter profile and the management team. The promoter and management team plays a pivotal role in strategising, strengthening, and directing the company’s day-to-day affairs. It would help if you analysed whether the company has an independent board of directors. The board of directors must be free from external pressure and work unbiasedly.

A well-organised and managed company is also an indication that the company can manage to generate a successful IPO.

  • Analyse the strengths and weakness of the company

The strength of a company can be gauged by its unique selling proposition, product and service features, strong customer base, and innovative products and services. Moreover, the company’s position in the industry with a competitive market share also helps to determine the prospect of the company. A promising company stands in a much better position to pull out a healthy and successful IPO.

  • Understanding the valuation and financial health of the company

A stable and healthy financial position of a company over a consistent period determines its success to a large extent. For an IPO launch to be fruitful and successful, the company should have a proven track record with consistent revenue channels and steady profits consistently. If the revenue and profitability position of the company is growing, it is an indicator of a good investment and a profitable IPO for investors like you. 

For you to understand whether the IPO price is overvalued, undervalued or fairly priced, it is wise to assess the financial and solvency position of the company.

A wise investor like you should avoid falling prey to any random stock market or investment tips. Instead, it would help if you did your research thoroughly. There is no direct answer to which IPO is good and worth investing in. It largely depends upon your risk-return objectives. If you are a risk-taking investor with the bandwidth and ability to take risks, it may be ideal to invest in risky IPOs compared to the overall market. However, if you are a risk-averse investor, consider investing in IPOs whose risks align with your risk-taking abilities.

Investing in IPOs can be a daunting and challenging task. Getting in touch with a financial advisor to suggest investment and IPO options based on your investment objectives and time horizon is always recommended. Geojit’s team of financial experts can also help you determine the right investment opportunity based on your investment goals.

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