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Main risks to know when investing in IPOs
1. The shares may or may not be allocated upon issuance of the IPO:
After you have applied, if you are eligible or if you fall within the reserved quota defined for your type of investor category, the shares will be allocated to you, otherwise. There is therefore no guarantee that you will receive any shares as part of the IPO.
In general, in the event of an issue being oversubscribed, the chances of issuing the shares are lower.
2. Evaluation:
As with a share, the right price at the IPO is also crucial, and for this the valuation of the issue is very crucial. As is the case now, there is a wave of IPOs in the primary market when liquidity is high and indices hit new highs and this is when the offers are made at valuations. high. This does not bode well for retail investors, as in such cases the issue underperforms the index over the long term.
Now after the stellar listing gains seen in the recent past for most offerings that thing has faded as well, now let’s wait and take a look at how ongoing IPOs will fare in regards to their listing as well as earnings. long-term.
3. To perform a full analysis, there may be insufficient information available:
For some of the newcomers to the industry, it will be difficult to determine how the company would fare or how its peers fared. This despite the financial data available in the Red Herring Outlook Project (DRHP) with SEBI. Say for example:
4. Regulatory issues should also be taken into account:
Let’s say for example that last year concluded the IPO offer of CAMS, these shares were listed on the NSE 7 months after entering the capital market. Indeed, at that time, CAMS was supported by the subsidiary of NSE.
5. Volatility:
These IPOs can see high volatility in the early days of their trading and there is also no limit as to when trading in these stocks can be frozen.
Points to remember when investing in IPOs
1. As with stocks, leverage should not be used to invest in IPOs, i.e. an individual or HNI should not borrow funds to invest in an IPO. in stock exchange.
2. Additionally, IPO investors should not be unrealistic about their expectations of IPO returns.
3. Retail investors should not engage in illegal, ie gray market transactions.
4. When investing in IPOs, it will always be in the investor’s best interest to stay in the stock for a long time, because as the business grows, your share in the company in the form of shares will experience. also growth.
5. For IPO investments, it takes a good understanding of economics, society and industry to be limited to IPO which will be good for them.
6. Investors do not need to be drawn to the novelty of the company or industry instead should do adequate profiling of the company and the sector, as well as its financial analysis, as well as determine the main risks as well as the areas to which they may be exposed in the economic and economic fields. business cycles.
7. If the investor has invested for listing gains, but an IPO has disappointed on this front, it may be wise to exit that investment early instead.
8. Financial data that should be monitored includes double-digit return on return on equity as well as return on capital employed. In addition, profit growth as well as its leverage position as well as debt on the company’s balance sheet should definitely be considered before investing in the offering. Another factor to keep in mind should be a positive cash flow.
Conclusion:
Investing in the stock market is a high risk and high return investment option and can indeed be avoided by retail investors and only after a good understanding of the performance of the company in the market. secondary, its management as well as its corporate governance that the investor can take action.
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