Understanding the stock market is fiddly for many beginners. A rookie investor should study the market for a while, scrutinize the behaviour of the stocks, and observe the differences in the strategies of the companies and its impact on the share prices. With IPO you can make a lot of money in a very short span of time, if you are not hasty. Tactful and timely decisions can bring you very good returns over a period of time. That period maybe short or long depending on the equities purchased.
Here, we throw light upon a few guidelines on IPO for beginners.
What Is an Initial Public Offering?
An Initial Public Offering (IPO) is the process through which a privately held company becomes a publicly traded company by issuing shares of its stock to the general public for the first time. In essence, an IPO is the first sale of a company’s stock to outside investors on a stock exchange. This significant financial event allows the company to raise capital by selling ownership stakes to public investors.
Also Read More About what is ipo?
How Does an IPO Work?
IPO is a process that allows a company to issue its shares to the market and raise capital. Investors can buy these shares, allowing them to own a piece of the company. Issuing an IPO involves several steps.
- Preparation: Before going public, the company works with investment banks, legal teams, and auditors to prepare its financial statements, business plans, and regulatory filings. A prospectus is created, providing detailed information about the company’s operations, risks, and financial health.
- Selection of underwriter: The company chooses an investment bank as an underwriter to help determine the price of the IPO. The investment bank buys the IPO shares from the company to sell to investors.
- Regulatory approval:The company submits its IPO registration statement to the relevant regulatory authority, such as the Securities and Exchange Board of India (SEBI). The authority reviews the documents for compliance with securities laws and investor protections.
- Advertising: The company, along with its underwriters, conducts a roadshow to market the IPO to institutional investors. During the roadshow, management presents the company’s financials and growth prospects to generate interest among potential investors.
- Pricing: The offering price is set based on investor demand, market conditions, and the company’s valuation. The goal is to find a balance between raising capital for the company and providing an attractive price for investors.
- Allocation: Shares are allocated to institutional investors, retail investors, and other interested parties based on their orders and demand. Some shares may be reserved for company insiders.
- Market debut: On the day of the IPO, the company’s shares begin trading on a stock exchange. Investors can buy and sell the shares on the open market.
- Post-IPO reporting: As a publicly traded company, the issuer must comply with ongoing reporting requirements, including regular financial disclosures and annual reports, to keep shareholders informed.
Investing in IPO: Good or Bad?
Investing in an IPO has both pros and cons. IPO investments can offer excellent opportunity to invest in emerging companies with significant growth potential. Being an early investor can allow you to participate in a company’s early growth stages, potentially resulting in substantial returns. IPOs often involve companies operating in innovative and disruptive industries. Investing in these companies can provide exposure to groundbreaking technologies and business models.
On the flipside, IPOs can be highly speculative and risky. Many newly public companies may have limited operating histories and unproven business models. The stock price can be volatile, leading to potential losses. Investors must do thorough research before investing in any company to understand its business and growth potential.
It is extremely important for you know the intention behind your investing. If you have been closely following the company’s growth, or you are familiar with the sector in which the company is working in, if you can assess the company’s growth potential and your substantial returns over a period of time – Then you can invest.
But make sure, you do not borrow money to invest in an IPO. There is no guarantee of returns. In case of a loss, the money goes into the black hole. And the loss should also be counted in the interest rate which you have to pay on the borrowed money. So, it is a wise decision to utilize your funds to invest.
Don’t bite off more than you can chew
The investment in IPO is very risky and the markets are often unpredictable. So, take an honest look at how much of loss you can bear on your investment. Caught up in the excitement of buying a new IPO, never cross that line!
Open a Demat account
For an investor to apply for shares, he should have a Demat account. What is a Demat account? Demat account is where the share certificates, government securities, mutual funds and any such financial instruments are deposited in electronic form. Without a Demat account, you cannot own any shares or trade in the stock market. You can open a Demat account in any of the registered Depository Participants (DP). You can open a Demat account with zero shares.
For online trading – Open trading account
To trade online which offers a lot of conveniences and saves time, one must have an online trading account. The stock market requires you to be registered with the stock-exchange through the registered members. This trading account is linked to the bank account. When you want to purchase, you transfer the amount from the bank to the trading account and the trading account buys the share and credits the shares to the Demat account.
Big backers need not mean big returns
Big names in the list of investment banks or major stock brokers should not tempt you to buy the IPO they are backing. They may have different calculation scales for their backing. You should abide by the company provided facts and figures in the prospectus and focus on its growth potential before investing in an IPO.
Don’t fall for the hype
Remember that the company which is going public along with its investment banks have put in a lot of money into the process of IPO. They will not miss an opportunity to make it look like a piece of hot cake which is in demand. Do your research; get objective information from the official site of the stock exchanges.
Wait till the lock-in period is over to buy IPO stocks
Lock-in period is the time period which restricts the people who have received pre-IPO stocks to sell their shares. If you can wait, you can analyze the stock’s profitability. You can prevent falling victim to early volatility.
Market trends and IPO’s performance is related
The market-trend depends on various factors, and involves stocks from a range of sectors. They follow the stock market trend but they do not lead it. An IPO which is fundamentally strong is bound to do well in bullish trends of the market. It is a sure shot way to make quick money.
Last but not the least; the Company is not liable to return your money post investment in an IPO. You may want to credit your luck or your wise decision making skills when you get substantial returns.
Is IPO good for beginners?
Investing in an Initial Public Offering (IPO) can be suitable for beginners, but it comes with its own set of considerations and risks. Whether an IPO is a good choice for a beginner depends on individual circumstances, risk tolerance, and investment goals.
Are IPO high risk?
IPO investments involve more risk than investing in an established company. The risk primarily arises from a limited operating record, uncertain market reception, and a lack of historical data.
Can I sell IPO immediately?
Yes, it is possible to sell the IPO shares after listing. Retail investors can sell their IPO shares anytime after the listing of the shares.
What happens if the IPO fails?
An IPO may fail to list at a premium on the stock exchange, but that doesn’t mean an end to the company. The company can realign its business model or expectations to find a path towards profitability.
Are all IPOs guaranteed to be profitable investments?
No, not all IPOs result in profitable investments. IPOs can be highly speculative, and the stock price may experience volatility. Some IPOs may perform well, while others may underperform or even decline in value shortly after going public.