7 Questions to Ask Before Investing in IPOs

A company raises capital by offering shares to investors from the general public through Initial Public Offering (IPO). It is known as the availability of shares in the primary market. After IPO, the shares of the company will be available to trade at the stock exchanges. It is the choice of investors to hold IPO shares or sell them at stock exchanges. Allotted IPO shares can be sold in the secondary market to earn short-term profit. For long-term profits, they can hold IPO shares and grow with the company. 

Undoubtedly, IPOs are profitable investments, but you cannot invest in IPOs blindly. Before investing in an upcoming IPO, you need to understand the basics of IPO and its terms.

7 questions enumerated to ask before investing in IPOs

1. What is the company’s financial status? 

Most of the time, an IPO is used to raise enough capital to grow the business. But there may be a reason that the company’s investors have sucked all the funds out of business and loaded it up with debt. And now flipping the debts to new investors. Some deals are for paying the debts of the company. Look at the comparative valuations in their red herring prospectus. You will come to know the company’s valuations and its position in the industry.

2. Is it a delayed IPO? 

It is better to access the history of the IPO you are interested in. If you find that it is a company’s second or third attempt to go to the public, do not consider the IPO. Several attempts to issue an IPO means that investors were not interested in the company’s previous IPO. You should research and find those unappealing aspects of the company before investing. 

3. Is it an investment or speculation? 

The risk associated with the IPOs is higher. That’s why sometimes it is called a speculative activity in the stock market. You need to find out if the company is profitable or not. So that it becomes an investment and not speculation. 

Recommended Reading: Best Investing Platform

4. Who are the promoters? 

Promoters play major roles in an IPO. Promoters can either be an entity or an individual. Strong promoters mean one can consider the particular IPO. You can recognize the names of promoters to know about the credibility of the issue and read about the promoters’ background. 

Recommended Reading: How to find the best Commercial Loan Broker?

5. What about the management track record? 

It’s important to trace the history of management. You can find out how much profits they have provided to their investors in the past. 

6. What are the major risk factors? 

Companies have to mention all major risk factors involved in the business in their prospectus. You can carefully read all risk factors to understand the business’s risk and save your money. 

7. Cash Flows in the Future

The future cash flows of a company based on performance make a huge difference. Sometimes the company might have very high revenue among its peers but have its cash tied down to a huge debt. In such a scenario, is it raising capital for paying off and will it recover easily?

Recommended Reading: How quantity surveyors help control the budget

It is hard to ignore the IPO market. IPOs can earn plenty of money on your invested capital only if you choose the right company. Get the answers to all possible questions and gear up your earnings. You will be needing a Demat account to apply for an IPO online which can open online with any SEBI registered stockbroker. 

What is a Demat Account 

A Demat account is an account that holds all your financial securities in electronic form. You can open a Demat account online to make investments conveniently. Your securities will be safe and secured in digital format.

Documents Required for Opening Demat Account – 

You need your PAN card, ID proof, address proof, Aadhaar number, income proof, bank details to open brokerage accounts. These are the Documents required for opening Demat account.