Dos and Don’ts in the primary market: Investor Beware

4 mins read
by Angel One
Do you know the dos and don'ts of the primary market? Now you can learn about them and keep yourself safe from investment frauds.

There are several aspects of investing in the stock market. One such option is investing in the primary market. The primary market is also called the IPO market. It is where investors buy securities directly from the selling companies before their stocks start trading in the secondary market. Frauds can happen in any market. Hence, investors investing in the primary market must be cautious enough to make informed decisions.

What is the primary market?

Before the securities become available in the secondary market, new stocks and bonds are sold to the public in the primary market.

The primary market is the source of new securities. Companies, governments, and other agencies issue debt-based and equity-based securities in the primary market. It is facilitated by underwriters and investment bankers who set the initial price range for the securities.   

Once the sale is complete, bulk trading activities happen in the secondary market.

As an investor, you should learn the dos and don’ts in primary market dealings.

Dos and Don’ts of primary market dealing

Investor awareness are critical for the uninterrupted functioning of the money market. So, here is a list of dos and don’ts of the primary market. 

  • SEBI needs the companies to issue a prospectus containing all information related to their offer before they launch an IPO. The prospectus includes details regarding the promoter’s background, company history, financial statements, and risk factors associated with the company’s long-term prospects.
  • Suppose an investor finds any inaccuracy or incomplete information in the red herring prospectus. In that case, he needs to raise the same with the merchant bankers or the officers mentioned in the document.
  • Consider the objective of the IPO before investing. Investment decisions depend on your investment goals, whether you’re looking for capital appreciation or a monthly receipt of coupon interest.
  • Research the reputation and track record of the underwriter involved with the IPO before investing.
  • Check the registration of the stockbroker/agent before transacting with them. SEBI has mandated all stockbrokers to register. Transacting with unlicensed stockbrokers increases your risks manifold.
  • You need to open a Demat account before investing in the stock market. If you haven’t received IPO shares after successful allotment, complain to the compliance team of the issuer.

Here are things you should avoid as a smart investor

  • Don’t get carried away by all the buzz investment bankers create. Please don’t invest without analysing the fundamentals of the company, its image, and its long-term prospects. 
  • Don’t invest in a business that you don’t understand. Several investment theorists and experts have warned investors against the risks of investing in companies/sectors that they don’t understand. 
  • Don’t invest in a company in the prevailing market condition unless you are sure of its long-term prospects. The current market condition may aid in the company’s success, but you need to evaluate the company’s prospects in the long run under different market conditions.
  • Similarly, when applying for an IPO from a public sector company, evaluate the company’s fundamentals before betting your money. 
  • You must have realistic expectations regarding short-term and long-term gains. Don’t invest with an expectation to realise high returns upon listing. 
  • Don’t invest based on unrealistic profit guaranteed by the promoters. 
  • Don’t invest with borrowed money. It may put extra stress and magnify your loss.

IPO investment is risky. If you don’t make an informed decision, you may lose all your initial investment if the IPO fails to list in premium. You must remember that research and patience are the two critical factors that can help you invest successfully in the long run. You mustn’t also accept an offer that doesn’t fit your overall financial goals. 

Angel One always helps investors make informed investment decisions. The website has an investor education segment that introduces the different aspects of investing and personal finance and helps you become confident. Open a free Demat account with Angel One and invest in stocks, bonds, commodities, currencies, F&O, and IPOs.