IPOs and FPOs: A Concise Guide for Indian Investors

A Step-By-Step Guide to Investing in IPOs and FPOs

No matter if you're a seasoned investor or a newcomer to the stock market, venturing into initial public offerings (IPOs) and follow-on public offerings (FPOs) can be an enticing and demanding endeavor. These milestones in a company's development provide the chance for investors to obtain shares and join the ranks of cutting-edge startups.

Published on 04 December 2023

This guide aims to provide a comprehensive understanding of how to apply IPOs and FPOs, breaking down crucial information, potential risks, and savvy tactics to empower you in making informed investment decisions.

Understanding IPO & FPO

An IPO, or Initial Public Offering, marks the moment when a private company decides to make its stock available to the general public. During this significant transition, the issuer partners with investment banks to navigate the process. Ultimately, after the IPO is successfully completed, the company's shares become open for online trading via online investment platform

The primary goal of this endeavor is to generate funds by offering shares through the platforms for investing, thereby providing the company with a crucial financial boost to propel its growth. In contrast, a Follow-on Offering occurs once a public company chooses to release additional shares following its initial public offering. This strategic move is typically made when a company seeks to secure additional capital for a variety of purposes.

Why Invest in IPOs and FPOs?

By participating in IPOs and FPOs, investors are granted the opportunity to enter a promising company at its initial stage. This may prove advantageous as early investors could potentially see their investment grow if the company performs well in the market. Furthermore, investing in FPOs also enables current shareholders to boost their ownership in a company they already believe in.

Researching and Analyzing Opportunities

Due Diligence: Researching the Company

Before deciding to go public with an Initial Public Offering (IPO) or Follow-On Public Offering (FPO), conducting a comprehensive due diligence process on the potential company is of utmost importance. This involves thoroughly and meticulously examining various factors such as their financial standing, business strategy, competitors, and growth potential. It is crucial to dedicate the necessary time to carefully analyze the prospectus, financial statements, and relevant analyst reports in order to gain a thorough understanding of the investment opportunity.

Assessing Market Conditions

A critical component of the pre-investment process entails evaluating the prevailing market conditions and investor sentiment. The overall market environment significantly influences the success of an IPO or FPO. A favorable market climate can contribute to the success of the offering, while adverse conditions may impact the stock's subsequent performance.

Understanding Valuation

It is crucial to carefully evaluate the company's valuation through a comprehensive analysis. This entails a thorough examination of crucial financial metrics such as price-to-earnings (P/E), price-to-sales (P/S), and price-to-book (P/B) ratios. It is essential to gauge how these ratios compare to those of industry rivals and to critically assess the reasonability of the proposed offering price. Such scrutiny is essential in enabling informed investment choices grounded in a deep comprehension of the company's financial status and market position.

Participating in IPOs and FPOs

Opening a Demat Account

To actively participate in Initial Public Offerings (IPOs) and Follow-On Public Offerings (FPOs), it is imperative to establish an IPO Demat account. A Demat account serves as an electronic repository for holding shares in dematerialized form. It is essential to ensure that your Demat account is not only active but also adequately funded well in advance of the subscription period commencement.

Monitoring IPO Announcements

Vigilant monitoring of IPO announcements is crucial for prospective investors. Stay abreast of upcoming IPOs by consistently checking financial news, company announcements, and market updates. Most stock exchanges regularly release IPO calendars, providing comprehensive information on forthcoming offerings. This meticulous tracking enables investors to stay informed and make timely decisions in alignment with their investment strategies.

Bidding Process

Engaging in the IPO or FPO bidding process demands precision and adherence to established guidelines. During the subscription period, investors must place bids for the desired quantity of shares within the specified price range. A meticulous review of the bidding process is imperative, coupled with strict adherence to the guidelines stipulated by the relevant stock exchange. This disciplined approach ensures a seamless participation experience and contributes to making well-informed investment decisions.

Risk Management and Long-Term Strategy

Managing Risks

Recognize the risks associated when you apply IPOs and FPOs, including market volatility, uncertainties in company performance, and the possibility of not getting allotted the desired quantity of shares. Diversify your portfolio to mitigate risk and avoid putting all your investments into a single IPO.

Long-Term Investment Strategy

Consider your investment horizon and objectives. While some investors may choose to flip shares for a quick profit, others may adopt a long-term strategy, holding onto the shares for potential future gains. Align your investment approach with your financial goals.

Post-Investment Considerations

Post-Listing Monitoring

After the IPO or FPO is listed on the stock exchange, closely monitor the stock's performance and market trends. Stay informed about company developments, earnings reports, and any news that may impact the stock.

Reviewing and Adjusting Portfolio

Periodically review your investment portfolio and make adjustments based on changing market conditions and your financial goals. Consider taking profits if the stock has appreciated significantly or reassess your investment thesis if there are shifts in the company's fundamentals.

Wrapping Up 

When done carefully and with a strategic mentality, investing in IPOs and FPOs can be an exciting and rewarding experience. Through an in-depth understanding of each aspect, investors can strategically position themselves to leverage the growth potential of prospective companies. Remember that effective investment calls for a blend of understanding, perseverance, and a long-term outlook. For long-term stock market success, as with any investment, it's critical to remain competent, adjust to shifting market conditions, and always improve your investment approach.

Chandresh Khona
Team Espresso

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