4 Key Tips & Strategies for IPO Investment | Espresso

Tips for Investing in IPO: IPO Investment Strategy

IPO or an Initial Public Offer is when a company sells its stocks to the public for the first time. These stocks can be bought by retail and individual investors and high net worth individuals. The cost of an IPO usually depends on the value of the company and its core business’s principles.

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If you want to invest in an IPO, you need a Demat or a trading account. In addition to this, you also need a smart IPO investment strategy.

A company announcing its IPO can be an indicator of its growth. But it is important to understand that there is no guarantee that an IPO can yield profits. The stock market is extremely volatile, which is why you must have a sound investment strategy when investing in IPOs. Here are some tips to keep in mind: 

1. Do Your Research

The price of an IPO and its performance can depend on the performance and value of the issuing company. This is why you need to research the company before investing your money. Many companies issue a prospectus that can help you get in-depth information on the company. However, these are mostly written by the company itself, so the information may not be unbiased.

Therefore, it may be better to conduct online research and read about the company from multiple sources. For example, you can check the latest and past press releases, profit and loss reports, as well as check the company’s competitors for comparison. The more you know about the company, the more certain you can be about the IPO investment.

2.  Check the Company’s Growth Potential

While thorough research can help you understand the issuing company’s track record and past performance, it may not offer you an accurate glimpse into its future. Therefore, when investing in IPOs, your investment strategy must include ascertaining the company’s future potential.

This can be gauged by looking at the company’s ideals and principles, their openness to new technology and innovations, the relevance of their products and services with the changing times, and more. If you are certain of the company’s future growth prospects, only then should you invest in the IPO. 

3. Pay Attention to the Cost of the IPO investment

Many times, an IPO from a famous issuing company can be priced at a higher cost. Many investors assume that a high price from a popular brand is justified. However, this may not always be the case. A reputable brand name can be one factor that affects an IPO’s cost. But it is not the sole criteria.

Moreover, it is no guarantee of the IPO’s future performance. This is why, instead of going by the brand name, you can look at the competitors and do a price analysis.

There are two types of ratios that can help here:

  • Price to sales ratio: This can be calculated by dividing the price of the stock by sales per share
  • Price to earnings ratio: This can be calculated by dividing the stock price by the net income per share. 

If the competitors have lower price to sales and price to earnings ratios, the issuing company’s stock is likely overpriced. 

4. Check the Performance of the Sector

Another useful IPO investment strategy is to check the whole sector's performance, not just the stock and the company’s. For this, you can look at other stocks within the same sector and see how they are faring. If you see a positive trend, you may go ahead and invest in the IPO. 

To Sum it Up

It is crucial to have a prudent IPO investment strategy to increase the chances of profits. So, instead of following trends or following in the footsteps of your peers, try to do your research and make up a decision on the basis of your own judgement. 

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Frequently Asked Questions

The issuing company decides the total number of days for the issue. This can differ for each IPO investment.

If you sell the stocks from an IPO within 12 months from the date of allotment, you will pay short term capital gains tax. Stocks sold beyond 12 months are taxed as long term capital gains.

Selecting a good broker can offer many advantages. For instance, you can bid for IPOs that are high in demand and therefore hard to get. The chances of getting a better allocation of shares are also increased if you pick a reputable broker. 

You need a Demat or a trading account for an IPO investment. You can simply log into your account and select the number of shares you want, along with the bidding price. If you receive the allotment of the stocks, they will be credited to your Demat or trading account. Otherwise, your money will be credited back to your bank account.