Festival of IPOs
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Festival of IPOs

There are certain basic things you should keep in mind while investing through IPOs

It sounds astounding that initial public offerings (IPOs) have become a most popular general tool in the hands of many companies to raise funds in the market to meet their business objectives and stay afloat after they have been materially impacted by the pandemic. This current IPO boom has triggered enthusiasm in the market and is not less than a festival where millions of investors, more particularly millennial first-time investors, are shopping a series of IPOs.

Last few months have witnessed a sharp rise in the market activities where the benchmark indices have been trading at record levels in the past one year. High liquidity in the economy has also fuelled the sharp rise of markets. During the course of this never-seen-before upward trend of the markets, the investors, especially the retail investors, have made huge gains which has been an attraction for others outside the ring to join the bandwagon. Capitalizing on the rush of retail investors boarding the equity market, many businesses in various sectors of the economy planned their IPOs to raise substantial funds to neutralize the virus-induced impact on their businesses as well as have funds in hand to achieve business growth on planned lines.

As per the data available from the Securities and Exchange Board of India (SEBI), the market regulator, August has been one of the busiest months as far as IPO filings are concerned. A record 29 companies filed draft prospectuses for public listings, to be a part of the ongoing passion witnessed in the Indian business houses to capitalize on the demand in equity markets. Notably, the previous record for filings of draft IPO documents by companies with SEBI in a single month was 22 recorded four times - in June 2004, February and December 2006, and in September 2010.

A market report states that the record filings in August capped a steady rise in filings over the past few months. In three of the past four months, a period during which the Sensex jumped 18%, the number of such filings has been in double-digits.

One of the most outstanding features of the IPO boom has been the entry of businesses which are driven by the Internet. The onslaught of the viruses on the economy dried the resources of capital for many businesses and internet-based enterprises were no exception to it. The market regulator (SEBI) responded to the changing trend of raising capital of online businesses and eased the entry norms and today we have Zomato, Paytm, Policybazaar etc as part of this historical IPO boom. Zomato’s successful IPO and a profitable listing has encouraged other similar businesses to follow the IPO track to buffer their capital. Apart from online businesses, a wide range of sectors beyond online firms have also hinted to sell their equity to the public.

Remarkably, the profitable listing of Zomato has garnered the attention of retail investors and they started evincing keen interest to take route of IPOs to let their money do the talking. Here it’s also notable that the low rate of interest on deposits in banks has been one of the reasons to see a shift in the investment pattern of the depositors. They are lured by the quick gains in the equity market in the last few months and want to reap the benefits. However, most of the retail investors, especially the first-time investors, hardly consider the high intensity risk which the investment in share market carries. Otherwise, the first task for an investor is to understand the functioning of the equity market and evaluate his/her risk-bearing capacity and cut the cloth according to the size. It is always advisable to consult professional financial advisors before venturing into the market.

Meanwhile, let’s specifically talk about investment in IPOs. In the last one year, returns from IPOs have indeed been phenomenal, owing to the continuous bullish trend in the stock market. But the real test for the company’s shares happens when the market is hit and falls in the bearish regime.

As the market is at its peak, what are the things you should keep in mind while investing through IPOs?

The first and foremost thing to remember is that an initial public offer (IPO) is a route taken by a company where it’s for the first time it raises money from the public for a wide range of activities. The funds raised through IPO may be utilized for clearing debt, funding expenses, going for business expansion and also achieving other business goals.

For a professional investor who understands the market and the available products well in line with his risk bearing capacity, a thriving share market presents an excellent opportunity to multiply his investment. But investing in the stock market purely based on hearsay can lead to heavy losses and can even wipe out the capital investment.

You can invest in the shares of a company directly through the primary market, that is., via Initial Public Offerings (IPOs). Besides, there is the secondary market where you can invest in the shares of the company after the IPO listing.

As far as IPOs are concerned, we are witnessing a sort of festival in the market where several unlisted businesses are lining up with their IPOs to raise capital. However, there is a mix of these companies where some are having a huge brand value in the market and others are not known much.

As the stock market is currently at its peak, there are certain things which you need to take care of before investing through IPOs.

You should be aware of the company’s business and evaluate its business model to check the growth potential. Don’t invest in IPOs of such companies whose business model is confusing or unclear to you.

It’s also very important to have a look at the past performance of the company and check the credentials of its management and promoters. Here it’s vital to know about the stability in the management of the company. If you find frequent changes in the management cadre of the company, it would be better to avoid investing in the IPO of such businesses.

Don’t ignore fundamentals of the company. There is no alternative to strong financial parameters of a company. If you are not able to understand the financials, consult a financial advisor and let him analyse the company’s financials for you. This will help you to assess the company’s growth prospects. Consider only companies with strong financial health.

So, you should select such a company with good fundamentals that can allow good returns in the future even if it fails to provide listing gains.

What are the risk factors in investing through IPOs?

Investing in the share market always carries high risk. So, it makes sense to learn about the risk factors before investing through an IPO. Let me quote an acquaintance who is a market expert. According to him, “you may not know the risk which the company carries by looking just at its financials. To know about such risks, you should carefully read its Draft Red Herring Prospectus (DRHP). Companies mention all risk factors that may impact their businesses in the short and long term in the DRHP. It may include litigation, contingent liabilities, and the possible threats which may impact its normal business operations.”

What are other key things to keep in mind?

The first and foremost thing is to think of investment in shares if you have your own funds and parking money in IPOs is in complete sync with your financial goals and risk bearing capacity. Don’t borrow funds to invest. Market experts advise that you should try to invest in an IPO on the second or third day after opening. This will give you an idea in assessing the public response. If the issue is oversubscribed by several times, chances of listing gain increase.

Lastly, if you are using products or services of a company which has come out with an IPO, don’t make it base of your investment in the said company. Always consider the basic things mentioned above before investing through an IPO of a company.

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