IPO or Initial Public Offering is a type of security that is offered by a company directly to the end investor. IPO is a method employed by a company to have an access to more funds in order to scale up their operations or to develop their business. In an IPO, the company offers an investor a slice of its own company with the right to profits in the way of shares.
IPO is traded in the primary stock market - an investor can directly buy shares from the company and then trade it in the secondary stock market. In the secondary stock market, the shares are listed and are traded on a daily basis by investors. A company issuing an IPO can issue any number of shares as authorized by its articles. The collective raised from the issue of the IPO is known as “raising capital” by “going public.”
Before investing in an IPO, the investor has to take the following factors into account.
Authentication of the background
Before capitalizing the IPO, an investor needs to know the history and the scope of operations of the company. The investor has to examine and analyze the company’s financial performance in the past years along with the management decisions executed by the company.
The background of the IPO
Having a detailed knowledge of the purposeof the IPO listing and the company’s plan to use the funds after the IPO is fully subscribed is an essential point for any investor. If unable to understand these details,the investor can enlist the services of a professional who will explain the pros and cons of the investment.
Read the prospectus
The prospectus is the most important document to be readbefore investing in the share market. The prospectus contains all the necessary informationabout the IPO and the purpose for which the funds collected will be used. The prospectuscontains every bit of information including the company’s financial reports and its past performances. All this information will help an investor to decide whether the investment inparticular IPO is worthwhile or not.
Company’s value in the market
Before investing in a prospective IPO, the investor needs to compare the value of the company with its rivals. Thisis done by equating the listed price of the shares with the share price of the competitor. If the company is new to the market and has no peers, then it is wise to estimate its valuation byusing the price to earnings ratio and return on equity. The price to earnings ratio is calculated by dividing the share price of the current stock by the earnings per share.
The lock-in period
Newly traded public stocks have a particularlock-in period for its insiders. This lock-in period forbids the insiders from selling the stock till a stipulated amount of time. If the insiders are holding to the stock even after the specified period, then it is wise to invest in those stocks. If they sell as soon as the time is over, that is to be considered as a warning sign.
If there is a delay in the IPO
If a company delays its IPO, it might be just waiting for the market condition to improve or the volatility of the market to reduce. However, if the IPO has been delayed many times for other reasons, then one must invest in that IPO after carefully analysing the reason of delay and the company’s performance during the delay.
Being cautious is a preferred trait for an investor, as the market is subject to any type of risk that might take place anytime. There is a cloud of uncertainty around the IPO’s due to their lack of past performance or available information. The investor should exercise caution when investing in IPO by researching and by the knowing all the scheme related document information.
It is always wise to know the risks involved before investing in an IPO.