Post-pandemic, investing has become a popular source of income, especially for millennials. Investors today have the opportunity to invest in high-quality private companies to generate returns. This process is known as an Initial Public Offering (IPO) from which both investors and companies benefit.Read more
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This article explores multiple aspects of an IPO investment in detail.
In an IPO or Initial Public Offering, a private company offers its shares to the public for the first time. A private company's shareholders may include its angel investors or venture capitalists (VCs). Once the IPO goes live, the general public can also become a shareholder through a share purchase.
Alternatively, we can say that promoters sell their shares to the public. An IPO requires compliance with the regulations of the Securities Exchange Board of India (SEBI). Companies hire credible underwriters to supervise the entire process from documentation to issuance.
Today, there are many IPOs lined up in the market. But why is it so popular? Besides raising capital, it can also increase companies' visibility that furthers the contribution to their valuation. Early investors can enjoy high returns on exit due to the liquidity. Also, companies do not need to borrow to finance the operations that save them the interest costs.
Now, let us talk about the benefits of IPO investment for investors.
The companies that launch an IPO are typically startups or growing businesses. These are the companies with high potential growth that need to raise funds for expansion. By investing in these rapidly growing companies before they grow, investors benefit from the first-mover advantage.
With an IPO, companies are seeking growth and expansion. Hence, the IPO price is usually at a discounted price. In the future, this could result in a rise in the share price of the company. Thus, the IPO market allows investors to invest in such companies at an affordable price at the start of their growth.
As an investor's life progresses, their financial goals change. From buying a house to sending children to college, to planning for retirement. IPO investments can help with these long-term savings goals. Through IPOs, investors are mainly investing in equity instruments and can reap better returns.
To launch an IPO, a company must comply with SEBI regulations. In addition, SEBI has imposed penalties on companies that do not comply with these terms. Thus, the entire process of issuing shares as well as documents are transparent. This builds investor trust. Furthermore, it is beneficial for the company to gain more clients.
To distinguish between a good and a bad IPO investment, proper research and analysis are crucial. Before discussing how to invest in IPO, there are some things that every investor must analyze:
Promoters and top management are the ones who run a company and decide its goals. The market reputation of the promoters of the company represents the fairness of its management, so it is vital to evaluate it. To understand the company's working culture, investors can also find out how long the top management has been with the company.
Evaluate the financial health of the business. Analyzing the profitability metrics will be able to reveal how the company has performed in the past. It will show if the company is on track and favorable for investment. To gain a better insight, the financial accounts can also be put in comparison with its market peers.
Risks are inherent in every investment. A successful investor assesses both returns, and risk in an investment. Investing in an IPO requires careful consideration of a company's litigation history and liability burden. Debts could affect the company's ability to operate.
Investors must understand the purpose of an IPO launch by the company. This can be done by reading the draft red herring prospectus of the company. The prospectus provides details on how the company plans to use the money raised, and the risks involved. By doing so, it outlines its plans. If the company does not intend to expand or grow, it may not be the ideal option.
You can use the following methods to invest in an IPO.
Let us understand the process further through an example.
You have an HDFC net banking account and wish to invest in an IPO like Aditya Birla Sun Life AMC Ltd. You can either visit their nearest branch or apply online. In this case, we will talk about applying through the online ASBA application process.
You will then follow these steps:
By now, we hope you have a fair idea about how an IPO can turn into a smart investment IPO with due diligence and research. Consider the above factors when deciding if a particular IPO is worthwhile. Investors must ensure they fill out all the required information appropriately to avoid rejection of their IPO investment application. For any assistance, you can always consult a financial advisor.
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