Generally, when a firm comes out from IPO or Initial; Public offering, there will be a lot of noise for it. Nobody would like to miss any kind of opportunity to invest in the IPO. However, not every IPO provides the desired outcomes. Some of the IPOs miserably fail and people experience heavy losses.
Below are some of the factors that one needs to consider before making an investment in an IPO
#1 Verify the background of the company thoroughly
Before making an investment in IPO, you should try to read as many details about that business as possible. Try to get as many details about the company as well as operations as possible. Assess how a firm performs financially and how well it has done for itself in the past few decades. It’s extremely important for the company to keep its financial credibility.
#2 Future prospects that the company has
It is very important for you to understand why the business is issuing an IPO. You may speak to the company’s management and try to understand its future plans. Also, check how the finances have been collected from the public and how will they be used in the future. You should know if the company would use the money for the purpose of expansion, for paying off the loans, or for something else.
#3 Look at the company’s valuation
Valuation is a very important factor that you need to consider while making an investment in the IPO of the company. One of the best ways is to assess the valuation of a company is to make a comparison between the prices of different companies that are there in the space listed. When a business is absolutely new in the market and it does not have any competition in the space listed, you may just check the valuation of the business with the help of the ratio of earnings to price as well as returns on the equity. The ratio of earnings to price is basically calculated by simply dividing the price of shares of the current stock by earnings per share.
Also Read - Top 5 Factors to Check before Investing in IPO
#4 Stay vigilant about oversubscription
The total number of company shares offered during the IPO is very limited. Moreover, the allocation of the company’s shares in each category of the investors, including retail investors is also pre-decided. Many times, the total application numbers made are way higher as compared to the number of company shares that are available on offer. Thus, the allotment of shares is proportionately done and there are also chances that you might get fewer shares than what you actually applied for.
#5 Keep reading the prospectus of the company
The very fine print of the IPO comprises all details regarding the company and business, the summary of financial statements of the company, structure of capital, management views, objects of issue, etc. The prospectus would give all the information regarding the IPO and thus it will be very easy to understand if the business is worth making the investment or not.