Every company starts from somewhere in the beginning. The initial phases present challenges of attracting investors, gaining leads and sales, and acquiring qualified professionals.
In order to get funding for these activities, newly listed companies offer IPO or Initial Public Offering to the investors.
What does IPO mean?
Companies with no stocks listed on the market apply for IPO to gain attention of the public. Such companies ask people to purchase their stocks. This is a tactic to acquire capital, which benefits investors as well. The obtained money is used to install equipment, pay off loans, or buy machinery needed to grow the venture.
Hence, companies get an opportunity to enhance their business. This enhancement allows the investors to gain profits by trading those valuable shares of that company.
An individual can directly invest in initial public offering or leverage a secondary market. The secondary market is where you can trade stocks of listed companies. The last couple of years have shown positive signs for the Indian primary market.
How to invest in IPOs?
If you are interested in buying shares via Initial Public Offering, focus on the following factors first:
- Research well about the company
The success of your investment depends on the potential of the company you are investing in. If that company is not able to convert capital into growth, you won’t get desired results. Hence, it is essential to read and research about the company. Thoroughly inspect every factor provided in their prospectus.
There are three major factors that you should understand when researching about a company:
- Current financial status of the company
- Previous success rates of the company in share market
- Objectives that the company has behind launching the IPO
Information related to these aspects should be available in the prospectus. You can research online as well.
- Understand the share limitation in advance
You should know that initial public offerings are provided with certain share limitations. These limitations restrict the number of shares that are divided among the investors. So, a popular IPO can decrease the number of shares you desire to get.
Many individuals apply for a certain number of shares in a particular category. If the number of applications goes beyond the pre-defined number, the shares are allocated proportionately.
Hence, you should be aware that if the shares are getting over-subscribed, then plan wisely.
- Complete document work as quickly as possible
These kinds of investments have a set deadline. You are required to fill an application and submit it to the agents or banks that are collecting it. You can get the form from a broker’s office. Just make sure that you don’t lose the chance due to deadlines.
- Choose by comparing
Valuation is definitely the most important aspect when looking for IPOs. The comparison of valuation improves your ability to invest in the right companies and gain profits.
Generally, there are a variety of technical factors associated with valuation. However, you can simplify the comparison by looking at other companies listed in the market. The secondary market is where you can look at multiple ratios related to price, earning, and books. Then, judging a share option becomes much easier.
So, follow the mentioned steps and look forward to positive yields with initial public offerings.