IPO Decoded: Weight the Risks and Benefits

The Boom of Launching IPO in India – Risks and Benefits From an Investor Point of View

Before you hop into investing in IPOs, make sure you have a detailed view of the risk and benefit analysis. IPO stands for Initial Public Offering. Many investors are pretty familiar with the term and are looking forward to investing in IPOs. If you are looking forward to investing in them this IPO season, it is high time you know a bit of IPO in detail.

The one primary thing to consider is that simply because IPOs have performed very well does not mean they will perform better in the future. There are a million risks associated with IPOs and before you dive into this flashy new thing, make sure you have known each one of those correctly. The newness of the concept should never deceive you towards any unworthy investment. IPOs indeed have their own set of pros and cons like any other investment type, but the other side is that you have to do plenty of research on them before an investment motive.

Benefits of Investing in an IPO – The Investors  Perspective
Early Action

One of the core benefits of investing in an IPO, at least from a successful investors’ point of view, is that you can get into the action very swiftly. A sustainable IPO investment will help you immensely to create a basal connection with high-yielding successful profit-making companies. If you want to earn massive profit in a short time, an IPO is an ideal way out for you. In the short run, an IPO is very productive and can yield highly profitable returns. In this case, it is essential to note that an investor must choose the right investment company.

During this time, investing in modern tech companies can be profitable because it is an era of new-age technology, and such companies will profit. For example, if you invest in a company that supports a revolutionising tech-based solution for a task, you can massively benefit from the same. Investing in an IPO will also help you consolidate and increase your wealth in the long run. However, the primary motive should be to increase wealth and opt for profits in the short run.

Enhanced Transparency

Accuracy and transparency are two crucial factors essential for responsible investment. IPO order documents are robust tools to clarify the price per security. However, the prices are subject to fluctuations in the market and are dependent highly on the changes. As an investor, you have to understand how to evaluate the pricing of the IPO and what are the best prices you can access.

Discount at Retail Quota

The discount at retail quota is one of the most lucrative parts of investing in an IPO. To make IPOs popular, the companies offer an innovative and lump value to their retail investors. If you are an amateur in this field, it would be best suited for you to invest under the retail quota so that your Initial investment step is marked with profit.

Chance to Review Investments

IPO investments have already made the job easier for the investors because the mess of secondary market trading can be well avoided in the case of IPOs. Despite the immense fluctuations in vetting, you get a fair chance of reviewing your investment. With the influx of many reputed companies into the IPO market, it has become easier for investors to place their trust and make lucid choices.

Productive Allocation

With the help of funds raised through an IPO, a blooming entrepreneur gets the scope of raising money for their business. Whereas in the case of secondary markets, you are buying shares from a seller. So in actualif words, funding for a productive allocation is applicable only for the IPOs.

Is an IPO Investment Risky?

If you fail to understand the company well, there are high chances that you will end up investing in the wrong IPO. Wrong IPO means that you will not gain anything for yourself and incur losses. You must perform thorough research on the company before planning to invest. Here are the top 5 risks to take care of before planning an IPO investment:

Uncertainty of Allotment

It is not that you want to buy an IPO share, and you will easily access it. However, for investing in an IPO, you will initially have to apply. However, you will fall under a particular investor category when you use it. However, after all the applications have been received, it will be difficult to decide whether you will be eligible for buying the shares of the specific IPO or not. Just like any other business, with the application number exceeding limits, there are high chances that you may not get the opportunity to invest in a particular IPO.

Lack of Information

In any type of IPO guidance, you will always come across a popular term, “do proper research prior to investment”. But what if there is no scope of research? Usually, an investor will try to reach out to the most common sources, however, of information. Still, most of the time, there is a lack of knowledge in popular databases like Draft Red Herring Prospectus (DRHP). This leads to confusion, and you can often identify your peers’ actions.

IPOs are Not Stable

The uncertainty associated with an IPO is not unknown to anyone. IPO is right now the most volatile component of the financial world. Whether the trade will remain in operational status or will be frozen is entirely unpredictable. That is why it is always better to go for investment only if you can withstand the atrocities in case any situation arises. Usually, the initial days during any IPO trade are highly crucial, and the maximum amount of business as well fluctuations are witnessed during this time. Later on, with advancing time, the motion of the trade becomes rigid.

What Should You Keep in Mind While Investing in IPOs?

Here are the top 5 things to keep in mind when dealing with an IPO investment:

  • Never be unrealistic about your return expectations from IPOs. Investors, especially the amateurs, are often swayed away by the hype around IPOs and estimate unrealistic profits from the same. However, this is not true and is something you should refrain from.
  • With the company’s growth, the value of your shares will grow. If you manage to stay put in the stock run for a long time with the same company, the chances of your claim witnessing higher growth are maximum.
  • Understanding the company, its nature, Modas Operandi, and previous records is crucial before investing in any IPO. Also, when you have multiple investment options, this essential research should drive your decision.
  • The disappointing performance of any IPO on listing gain face should be the crucial indicator for you to exit from that IPO at the earliest. The sooner you leave, the lesser damage caused. However, you have to follow the continuous evaluation process to take action rapidly.
  • Following are the imperative numerics that must be followed when deciding whether or not to invest in an IPO:
  • Return on Equity
  • Return on Growth
  • Earnings growth
  • Leverage position
  • Balance sheet debt
  • Nature of cash flow ( should be positive)
Final Words

So, after all these, many of you must be thinking that you have ended up in a mess and all the strings are entangled. Well, that is not the case. It may seem intimidating, and to be honest, it is valid to some extent but dealing with IPO investments is no rocket science.

The fact is that: You can, and you should invest in an IPO only if you understand all about it in depth. With a superficial knowledge about IPO, it’s better not to indulge in the dealings. So before choosing the company to invest in, you must have a good idea about the company’s whereabouts, right from their previous records to their market worth and credibility.

One of the most recent observations about IPO dealings reveals that in most cases, IPO investments are based on peer pressure, hype and the emotional psyche of the investor. Everyone else investing in an IPO makes you become a part of the hype wave. This is detrimental to your wealth and investment, and it will be better to abstain from such behaviour.

If you are planning to invest in an IPO, one of the essential tasks you must perform should be realising your investment goals and your risk tolerance capacity. An ideal balance between the two should drive your IPO investment journey. Also, scrutinise the liabilities and litigations that impact the growth and value of the company whose IPO you are investing in. Understand the company well and weigh your investment potential before waving the flag to your IPO investment journey.

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