What is an Upcoming IPO investment?
An upcoming IPO (Initial Public Offering) refers to the very first time a private-owned business entity throws open its equity share to public investors. When a private company decides to go public with an IPO offering, it is normally underwritten by an investment bank or broker that purchases a part of its shares for a pre-decided price. These shares bought by the underwriting entity are then released into the financial market through multiple stock exchanges that allow for investment in IPOs with the sale and purchase of company stocks.
A company usually goes public with an IPO offering due to a variety of reasons such as raising capital, compensating its employees with public company stock options, acquire or merge equity in another company, or build a brand for reaching a wider customer base.
Identifying the Best Upcoming IPOs for Investment
Every investor, seasoned or a novice, wants to invest in new upcoming IPOs and grab a stake at competitive prices in a business that holds the promise of becoming a future business leader in the industry. Buying a company’s shares in the best upcoming IPOs guarantees exponential flourishing of its future share value once the company establishes itself. Despite the benefits, a new upcoming IPO is fraught with risks. There are ample situations when an investor’s IPO evaluation strategy has gone wrong, leading to a loss of hard-earned money. Hence, it is important to carefully identify the best upcoming IPOs for investment, and here are a few ways of doing so:
Evaluate the Business Strength
Before going ahead with an investment in IPOs, thoroughly study and understand the company’s financial strength, management capabilities, and performance track record over the past few years. Every company offering a new upcoming IPO issues a red herring prospectus which contains information about the above information needed to evaluate the company’s business strength. The red herring prospectus could be a good primer to review the company’s business model and strength. Besides, additional information about the company may be accessed through its website, annual reports, media reports, and business magazines. Invest in a company’s IPO only if you are doubly convinced of its financial credentials and strong position in the industry.
Focus on the Growth Prospects
The best upcoming IPOs to invest in are the ones where the company holds the strongest growth potential for the future. Before starting your investment in IPOs, gauge the future growth potential of the industry in which the company operates. Then, assess the possible market share of the company in the coming years. Parameters such as the company’s investment in technology and innovation, market expansion strategies, and its ability to leverage its strengths further can come in handy while assessing the future market share of the company. If these parameters are encouraging and inspire confidence, you could go ahead with the IPO.
Judging the Intentions of the Management
Reading the intentions of the company’s promoters and management is essential to invest in new upcoming IPOs. It is important to understand how much interest the promoters or the management holds in the company before investing in an IPO. In India, the SEBI law requires the promoters to hold at least a 20 percent stake after an IPO, and this percentage is normally higher in the case of successful companies.
If the company’s promoters are diluting their stake beyond limits mandated by law, then it indicates that they have lost faith in the company’s future or could also indicate some sort of foul play. Similarly, a company’s management rewarding itself with fat remunerations or huge dividends while diluting its stake before an upcoming IPO should also be considered as a sign of suspicion and it is advisable to stay away from such IPOs.
Verify the Intended Use of IPO Money
The red herring prospectus issued by a company states the intended use of IPO The best upcoming IPOs are those that use their proceeds towards investing in new technologies, entering new markets, acquiring other businesses, or setting up an additional production facility, all of which are aimed at the company’s growth. All these growth-propelling investments could soar the company’s revenues resulting in higher stock prices and dividends. It is better to avoid those IPOs that use their proceeds to repay their old debts, settle old claims or make any capital-related investment.
Determining a Stock’s fair price
Making an upcoming IPO investment in a company with a brand name may not always be the best way as famous companies usually price their stock higher than their actual worth and tend to turn into oversubscribed IPOs. The company’s brand value must be read in conjunction with its P/E (Price-to-Earnings) and P/S (Price-to-Sales) ratios to estimate the fair price of its stock through a competitor analysis. If these ratios are higher than those of its competitors, then the stock may be overpriced and thus avoidable. However, to be doubly sure, taking a look at the company’s history and prospects is also advisable.
Investing in a good IPO involves deep research about the company and carefully reading through its red herring prospectus. Equally important to invest in a new upcoming IPO is selecting a reliable, established stockbroker with strong credentials. Given the fact that sound IPOs are tough to participate in, an established broker can set you up with a solid allocation of shares through their known connections. Opening an IPO account with trusted online brokers such as Angel One is hassle-free and allows you to manage your portfolio with zero brokerage, and account maintenance fees. With the online IPO account, you can trade for free in equity delivery and at a flat rate of Rs. 20 per order in intraday, currencies, Futures & Options, and commodities segments. Additionally, opening a trading account online with Angel One also helps in investing in IPOs.