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Some tips for investors looking at investing in an Initial Public Offers (IPOs)

   The domestic stock markets have been through a spectacular rise over the last few months, and the trend is rubbing off in the primary markets as well. There is a flurry of initial public offers (IPOs) and follow-on public offers (FPOs) by private as well as public sector companies. Strong inflow from foreign institutional investors (FIIs) has resulted in ample liquidity in the markets. The corporate sector is trying to cash in on the liquidity situation and bullish market sentiments to raise capital from the markets in the form of equity.

   There are many takers for the good and reasonably priced public offers. There has been a good participation by individuals, high net worth individuals, domestic institutional investors as well as FIIs. On the other hand, many offers struggled to get complete subscription due to over-pricing issues or weak fundamentals.

   Earlier, investors used to invest in IPOs in anticipation of listing gains. However, the primary market is getting more mature with time.

   These are some points you should keep in mind while deciding on investing in an IPO:

Objectives of IPO    

This is one of the first points to analyse on a public offer of shares. Usually, the companies that go for public offers have certain objectives behind the offers. These include raising the funds for business growth, retiring/reducing debt, stake sale by some of the promoters etc.

   Investors should analyse these objectives carefully and get an idea about the future of the business and company's growth. It is important to keep in mind the expectations of future earnings' growth of a company is the prime driver of its stock prices in the market.

Pricing of the issue    

The pricing of an IPO is very important. Investors should look at various ways to determine the pricing of an offer. The simplest way is to read various reviews. Investors can do their own due diligence of an IPO by comparing its price with respect to its peers in the industry, checking various ratios, order books, future growth plans, risks etc.

   It is advisable for investors to look at investing in an IPO with a medium to long-term perspective.

Market sentiment    

This is another factor that drives subscription of the issues. However, investors should analyse the reason for subscriptions of an offer carefully - whether driven by fundamentals or driven by speculation. Investors should not get carried away by the reports of subscriptions to an issue. They should concentrate more on the fundamentals and pricing of an issue.

   There have been many over-priced issues being over-subscribed during good market conditions, but they lose value sharply after listing and result in heavy losses for individual investors.

Personal financial condition significant    

It is always advisable for investors to invest only their risk capital in the markets. Investment in an IPO is also an investment in equity. Even if the primary markets are looking much better than they were a few months ago, it is not advisable to borrow money to invest in IPOs for the sake of listing gains. Investors should keep in mind that even a large IPO may not list very high after the allotment as it draws a lot of liquidity from the market.


   On the other hand, a good small IPO may get subscribed many times over and hence the allotment becomes very small, reducing the chances of a high listing gain. Investors looking at listing gains should also keep in mind that the stock markets are trading close to their all-time high and there are chances of a correction in the short to medium terms.

 

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