A Beginner's Guide to IPO Investing

Initial Public Offerings (IPOs) can be risky as well as rewarding. If you’re new to the stock market, check out this quick guide on IPO investing for beginners.

Investing in Initial Public Offerings (IPOs) of companies is a good way to generate wealth over the long term. There have been many instances where companies have gone on to become multibaggers in just a few years after their initial public issue. 

That said, there are a few instances where companies have failed to live up to the hype created around their IPO and turned into laggards as well. This beginner’s guide to IPO investing can help you avoid common mistakes while investing in IPOs. Check out some practical tips and strategies that can help you make informed decisions about investing in public offerings.

 IPO Investing For Beginners Investing in public issues of companies can seem challenging for beginners. However, by following the 5 simple tips outlined below, you can make the investment process a lot easier and make smart decisions about which IPOs to invest in. 

1. Open a trading and demat account 

In India, a trading and demat account is a mandatory requirement for investing in IPOs. Without these accounts (which are often offered together), you cannot subscribe to the public issue of a company. Therefore, as a beginner, the first thing you need to do is open a trading and demat account with a reputed stockbroking entity. This way, you can ensure that you’re well-prepared to subscribe to IPOs as and when they are announced. 

2. IPOs are ideal for the long term 

While it is true that a few IPOs have provided investors with listing gains and short-term profits, not all IPOs result in such massive price rises immediately after listing. It is important to understand that every issue is different. Some stocks may take a few months or even years to yield meaningful returns. The trick is to remain patient with your IPO investments and have a long-term outlook. 

3. Study the prospectus thoroughly 

Every company that plans to issue an IPO will publish a document called the Red Herring Prospectus (RHP). It contains extensive information about the company, its business, financial statements, and details of the offer, among others. Since there’s usually very little information on companies issuing their shares for the first time, the Red Herring Prospectus should be your primary source of information when evaluating an IPO. Read it thoroughly and make an investment decision based on the information it contains. 

4. Be wary of overvalued IPOs 

Valuation is one of the major factors that you need to consider when investing in IPOs. An overvalued IPO is an offering where the pricing of the stock does not justify the financial health or status of the company. Many entities tend to price their IPOs much higher than the value suggested by their financial metrics. Such IPOs traditionally do not perform well, and may even trade well below their IPO price for several years with no recovery in sight. It is a good idea to stay away from investing in such overvalued IPOs. 

5. Keep an eye on the market trends 

The trends and investor sentiment prevailing in the markets have a strong effect on how an IPO performs. For instance, if the market trend is bullish, IPOs are likely to perform well. However, if the market trends and sentiment are bearish, public issues are more likely to struggle. Therefore, before investing in IPOs, always ensure that you consider market movements and evaluate investor sentiments thoroughly. 

Conclusion

 Investing in IPOs always has its own set of risks. However, by adopting a proper evaluation method and following the IPO investment strategies outlined above, you can minimize these risks and pick the right issues to invest in. When executed right, these strategies can also help meet your financial goals as planned.