Investing in IPO — Here are some useful tips
During this digital era, there are a lot of companies that jump into the sea of the stock market with the intention of creating a huge name. And with this, they end up with a fate that leaves no trace of their existence. In fact, some people may experience huge first-day gains or huge long term gains. While some others may get disheartened with their first IPO prices going red on the very first day or when it takes a downhill path in the long term.
The thing that can be taken out of such instances is that there isn’t a sure shot way to gain money in the stock market. This is because they are way too volatile! Finding a good IPO is difficult but it is not impossible. In fact, a good IPO has specific traits. If you can get most of the traits right in the IPO you are planning to invest in, then your chance to get lucky is much more than you knew.
So, to help you get the right IPO at the end of the day, here are some tips to help you out. Remember to follow them carefully as they are the ones that will help you be sure in the IPO you are investing and lose nothing at the end of it.
Tip 1: How to select an IPO?
In case you are thinking to do detailed research and get into every detail of the prospectus where you browse through the articles from any third-party websites or from the investment banks, then please STOP now! To do the research yourself, you obviously would not have a way into all the organization’s information, which would then help you in making the decision.
The 3rd party websites are usually compromised to offer biased views. While the brokers and investment banks would have their own vested interest to show the company they support in a good light. So, the rule here is that if the QIB (Qualified institutional buyer) category is over-subscribed, then you can trust that IPO.
Note: Typically, a QIB is a company that manages a minimum investment of $100 million in securities on a discretionary basis or is a registered broker-dealer with at least a $10 million investment in non-affiliated securities.
When the QIB is higher, this means that the institutions have much better access to the company data than the retail individual investor. And with this, you can be sure that the institutions will not put their money where it won’t grow.
Tip 2: It is important to know how they will use your money
Read the prospectus where they will state the details based on how they will make the use of such a huge capital that would be raised from the public. Their plan of action can include spreading their wings into a different sector, coming up with new products, bettering their infrastructure or just clearing off the debts that they have.
And any of these or a combination would have a huge potential to produce more revenue for the company. So, if the prospects look promising, the chance of purchasing the stocks from the company would be a good idea.
Tip 3: Invest at a cut-off price
In case you are a retail individual investor, and you want to increase the chance of obtaining stocks allotted, then bid at a cut-off price. By doing this, your application would be considered regardless of if the final allotment price.
Tip 4: Analyze the prospects of the company
The timing of the entrance of the company into the market, and the success of the competitors in the same sector and their drive to make the most out of the market share should be analyzed before you invest in an IPO. Basically, you will have to look into everything about the company such as the history of the company as a private business, the fundamentals they believe in, and their growth path. Every matter has to be considered before you are about to put in money into that company’s IPO.
Tip 5: Fill out the form with every detail
While you fill the application form for the IPO, ensure that you fill in every detail that they have asked for. The forms that are incomplete usually get rejected. Moreover, if you miss out on filling out an ECS refund, you might be cut out from the facility of easily getting the refund into your bank account.
Tip 6: Pick a company with strong brokers
Try to select a company that has a very strong underwriter. Just so you know, investment banks are not bad for the public. But in general, quality brokerages offer quality companies to the public. Hence, it is very important to exercise more caution when selecting smaller brokerages since they might be willing to underwrite any company.
Nonetheless, there is one positive point of the boutique brokers which is that since they have a small client base, it becomes easier for the individual investor to purchase the pre-IPO shares. But this can raise a red flag if not done the right way. You need to be aware that most of the large brokerage firms do not permit your first investment to be an IPO. The only individual investors who get in on IPOs are long-standing, often high-net-worth, established customers.
Tip 7: Look at the company’s valuation
Valuation is the toughest to conclude for retail investors. This process is extremely technical. The investment bankers and under-writers judge the quality of management and returns before reaching the final offer price of the shares. It is important that you compare the valuation of the IPO in the secondary market with a listed peer before you invest in that company’s IPO.
Tip 8: How should you judge the IPO?
In case the IPO is of the new private company, then judge it using the formulas such as the price to earnings ratio, return on equity, and price to book ratio. This would help you understand if you should purchase the IPO you are planning to purchase or not.
Conclusion
During every month successful companies go public. And it is difficult to sift through the riffraff and find the investments with the most potential. Before you think otherwise, this is not a suggestion to avoid all the IPOs in the market. In fact, it is advised to move ahead with caution. Just keep in mind that when it comes to dealing with the IPO market, a skeptical and informed investor is likely to see his holdings perform much better than one who is not.
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