Are IPOs appropriate for investments?

India Infoline News Service | Mumbai | April 12, 2015 10:29 IST

An investor should refrain from following the crowd but rather focus on fundamentals and business prospects of the target IPO company.

The News
As the market starts performing fast, the first thing most retail investors do is invest in an IPO. They believe that a strong market movement will automatically help them make explosive gains in a matter of days. Some IPOs do well in a rising market, but many of them fail too. Following are some factors that make investing into IPOs a less ideal.

1) If everyone is buying then why not me? - Going with the herd is the biggest reason for retails investors to apply for IPO. Reliance Power remains a historic example of how a prospective IPO turned into a losing proposition for crores of investors. An investor should refrain from following the crowd but rather focus on fundamentals and business prospects of the target IPO company.

2) IPOs Outperform Peers - Another misconception is that IPOs are better buys than already listed competitors. However, the past record does not validate this point. In fact, already listed companies are more reliable as they already have a track record of their performance, which should serve as a good starting point for initiating investment.

3) All IPO companies are financially strong - An absolutely wrong perception. Not every company going public has financial strength. There are many companies, which do not have strong balance sheets, and yet they go public to raise funds in order to continue even basic operations.

4) IPO is at an attractive value - A company might have already distributed its shares to a bunch of big investment firms and institutional investors for a lower price through a private placement. Hence, it is not necessary that an IPO price means best price to get into a company. There are higher chances that other big investors might have already be in for lower prices and have already made profits by the time IPO is launched.
 

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