Planning To Invest In An IPO? Keep These Factors In Mind

An investor must know the financial history of the company and evaluate its performance over the past few years to understand its growth potential

Planning To Invest In An IPO? Keep These Factors In Mind

A company's valuation is one of the most important factors that an investor has to consider

As the initial public offering (IPO) boom picks pace in India, with many start-ups planning to go public later this year, tremendous opportunities seem to be opening up for investors. Recently, Zomato launched its IPO, which was oversubscribed 38 times before it closed on July 16. Now, the market is waiting to see how the share performs in the initial weeks after being listed on the bourses. The food-tech company's performance is likely to have a big impact on a number of internet-based start-ups that are going public soon.

There are some factors that all investors, especially those who are investing for the first time or are novices in financial issues, should keep in mind. They are:

1. Learn The Past To Understand The Future

The first thing to do before investing in an IPO is to check the company profile and background. An investor must know the financial history of the company and evaluate its performance over the past few years to understand its growth potential. This research will also throw some light on why the company is coming out with an IPO and where it wants to use the money collected from the public (for expansion or to pay loans).

2. Evaluate A Company

A company's valuation is one of the most important factors that an investor has to consider. The best way to evaluate it is to compare its price with that of its peers. You can also calculate this using the price-to-earnings ratio and return on equity. The price-to-earnings ratio is done by dividing the share price of the stock by the earnings per share.

3. Be Cautious About Oversubscription

A company offers a limited number of shares during an IPO. And the allocation of shares to each category of investors is pre-decided. Sometimes, the number of applications made for an IPO can be higher than the number of shares offered. But the allotment of shares among the applicants is done proportionately and it is possible that you may get fewer shares than you had applied for. So, it's wise to be cautious about over-subscription.

4. Read The Prospectus Carefully

Most of the fine prints about a company are contained in its prospectus. It has details about the company's business, its summary and financial statements, capital structure, management views, etc. The prospectus gives overall information about the IPO.

5. Don't Fall For Hype

Finally, be objective in your judgement. Look at the stock market positioning: Whether it is in a downtrend, raising the possibility of the IPO being affected negatively. Additionally, do not get carried away by any hype while investing in the IPO.