Investing in listed IPOs (Initial Public Offerings) can offer significant opportunities for high returns, but it also comes with considerable risks. As a first-time investor or someone seeking to diversify their portfolio, it’s crucial to approach IPOs with a well-thought-out strategy. In India, the average IPO size surged from ₹867 crore in 2023 to over ₹1,700 crore in 2024, reflecting increased issuer confidence and investor interest.
To make the most of this potential, you need to conduct thorough research, evaluate the underwriters carefully, review the prospectus, exercise caution, and understand the lock-up period. These strategies can help you manage risks while maximising the potential rewards of investing in IPOs.
Conduct thorough research before investing
Before you decide to invest in any listed IPO, it’s crucial to conduct extensive research. Information on companies set to go public is not always readily available. Unlike publicly traded companies, which numerous analysts scrutinise, private companies lack the same level of exposure. Even though an IPO prospectus aims to provide transparency, remember that it’s often written by the company itself, which may downplay potential risks.
Digging deeper into a company’s history, competitors, press releases, and overall industry health is essential. The more information you can gather, the better you will be able to assess whether the company is a wise investment. Your research might even reveal that the company’s prospects are overblown, leading you to decide not to act on the investment opportunity at all. This kind of due diligence helps in identifying the most promising listed IPOs to invest in.
Choose a reputable underwriter
The underwriters or brokers behind an IPO are key to its success. Reputable firms like Goldman Sachs are selective about the companies they bring public, signalling solid prospects for the listed IPO. Their reputation is tied to the success of these offerings. While smaller boutique brokerages may provide access to pre-IPO shares, be cautious, as they may be less discerning in their choices. When evaluating a listed IPO, consider the underwriters’ reputation, experience, and track record as indicators of whether the investment is worthwhile.
Scrutinise the prospectus carefully
The IPO prospectus is a crucial document that outlines a company’s finances, risks, and how it plans to use the funds raised. While the company itself writes it, don’t skip reading it. Focus on how the funds will be used—if for repaying loans or buying shares from private investors, it may signal instability. Positive signs include using funds for growth, such as research or expansion. Also, watch out for overly optimistic earnings projections, as they could lead to underperformance and negatively impact your investment.
Exercise caution and scepticism
Scepticism is a useful trait when investing in listed IPOs. With limited available information, IPOs carry significant uncertainty, and you must approach them carefully. One important point to remember is that if your broker is pushing an IPO aggressively, it may be because institutional investors have passed on the opportunity. This could suggest that individual investors might be getting the “leftovers” that the bigger investors didn’t want.
Also, be aware that most brokers allocate IPO shares to their favoured clients, so if you’re a new investor, getting in on a popular IPO can be difficult. If you’re trying to invest in IPO shares, consider considering if your broker is aggressively marketing the offering.
Be patient and wait for the lock-up period
The lock-up period is a crucial aspect to understand when you’re investing in listed IPOs. This period, which typically lasts anywhere from three to 24 months, prevents insiders (like company founders and executives) from selling their shares. When the lock-up period expires, a significant number of shares may flood the market, potentially causing a dip in the stock price.
Weigh the risks and rewards
Every investment in a listed IPO carries both risks and rewards. While early-stage companies often have high growth potential, they also face numerous challenges, like market competition, regulatory changes, and operational hurdles. Having a balanced view of both the positive aspects and the potential pitfalls will help you make a more informed decision when deciding to invest in IPO shares.
It’s essential to assess the company’s long-term growth prospects, its market position, and the overall health of the industry it operates in. This way, you will have a clearer understanding of whether the rewards outweigh the risks.
Make informed IPO investment decisions today!
Investing in listed IPOs can be a highly rewarding venture, but it requires strategy, careful research, and patience. By conducting thorough research, choosing reputable underwriters, scrutinising the prospectus, exercising caution, and waiting for the lock-up period, you will be in a stronger position to make informed decisions.
Remember that while IPOs can offer significant growth potential, they come with inherent risks. A trusted online trading platform like Ventura can offer the tools and information needed to navigate the IPO market with confidence. Ensure that you weigh the benefits and potential pitfalls before deciding to invest in IPO shares. A careful approach can help you navigate the complexities of IPO investing and set you on the path to long-term success.
