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What is a IPO?
IPO is the abbreviation of Initial Public Offering. When a privately held company wants capital it can make an Initial Public Offering. It will get listed in the stock market for the sale of securities to the public. This process is done through the primary stock market. Common stock issued to the public by a privately held company initially or the first time is an IPO.
Methods of IPO Launch
A company can choose any of the following methods for launching an IPO
Fixed Price Method
Book Building Method
Combination
Why Should I Invest in an IPO?
Long Term Benefit:
Investing in an IPO is suggested and can be linked to long-term goals. This would mean an investor could plan retirement or buying a house with the help of the amount gained over time.
Price Clarity:
The price of the issued IPO would be stated in the order documentation. At this stage, the price and ranges are more transparent. After some time, the prices would change as per the market conditions.
Inexpensive Purchases:
The price of an IPO of small companies is often very low. The issuing companies have the potential to grow and scale. The gains are more when the share prices go up in future
Wealth Accumulation:
IPO is suggested for growth as they are the foundation of a company. The funds can grow in the medium to long term.
IPO Investment Tips to be Considered
1. Issuing Company Performance:
It is essential to understand the issuing company's performance for success in IPO investment. Check for the previous year's growth rate of the company to be nearly or over 20% annually. The average growth range can be compared with the sector's growth rate. When the company's growth rate is lower than the industry's, it is under-performance.
2. Research:
It is advised to do an excellent online study before an IPO investment. This is because private companies may not have readymade analysis available. All press releases of the company in the past should be analyzed.
3. Prospectus:
One cannot rely on the prospectus entirely. However, the prospectus must be obtained from the broker to understand the intent of the IPO. Loan repayment and the purchase of equities are not good signs. Market expansion and other expansion activities with the IPO would be an investment to consider.
4. Promoters and Brokers:
An IPO from a good underwater or a strong broker in the market would advise a good IPO. The background and experience of the promoter should be researched. The promoters' history of loans or default in payment should be studied. Default payment is not a very good sign for purchasing the IPO.
Frequently Asked Questions (FAQ)
In the book building method of IPO issue the final price is not decided in the beginning. The beginning or the lowest permitted price for the bid is the floor price. The highest price is the cap or the cut-off price.
DP is the acronym for Depository Participant.
