From 2004 to the fall in 2008, IPOs saw a tremendous boom. After this, this trend was seen again in 2015. Now since last year, the IPO trend has picked up again. In such a situation, various questions are arising in people’s minds regarding IPOs. Generally, people invest in IPOs for the wrong reasons. If you do not want to be cheated in IPO investment, then you need to ask yourself three questions.
Why do you want to subscribe to the IPO?
If you want to invest in a company’s IPO just because you have used its products and they are good. Can this be the right reason? Just because you use the brand and its products, will its growth be sustainable? Being a consumer is completely different from being an investor.
Investors need to avoid herd mentality in this matter, for example, the notion that if everyone is investing in it, it must be right is not correct. During the technology boom of 1999-2000, people were investing in dotcom companies indiscriminately. However, many such companies were delisted or disappeared. Similarly, something similar was seen in the real estate and infrastructure sector during 2007-2008. At that time, investors were very interested in Reliance Power and HDIL.
Now questions can be asked on the same lines, ‘Will Bajaj Housing Finance be a multibagger like Bajaj Finance? Will ONGC Green Energy be a better bet in the renewable energy space?’
What is your investment based on?
Investors should ask themselves what is your opinion about the basic business model, growth prospects, financial stability, cash flows, background etc. of the concerned firm. Does your analysis suggest that the issue price is overvalued or undervalued? What do you know about the fundamentals of the company? What is the purpose of raising funds – business expansion, debt repayment, acquisition or other?
In fact, if a company sells shares to the public, it would want to get the maximum value from it. Therefore, most IPOs come during bull markets, when prices are very high and investors are willing to pay any price. Therefore, it is not right to assume that all IPOs are offered at a cheap price.
Are you buying just to sell?
If you invest in an IPO with this intention, you are not alone in doing so. According to a recent study by the Securities and Exchange Board of India (SEBI), the most important sellers on the listing day are non-institutional investors, who typically bid for more than Rs 2 lakh during an IPO. Since this category often relies on external funding for its bids, most such investors are expected to sell their shares on the listing day itself. On an average, 54 percent of IPO shares allotted to investors are sold within a week of listing.
In fact, compared to the number of IPOs that make money from listing, a lot of IPOs do not make money. If you want to invest, pay the right price and hold it. In this way, the chances of losing money are very less.