5 IPO Mistakes to Avoid before Investing in IPOs

Want To Invest In The IPO Market? We Have The Top 5 IPO Mistakes That You Should Avoid

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2021 was a bumper year for the IPO market in India. The increase has been largely due to the government of India’s pro-business policies that several enterprises chose to get listed on the stock exchange.

Right from new-age start-ups, tech and e-Commerce companies to large-sized public offerings stirred up the appetite of retail investors in India with opportunities for stellar IPO investing around the year. Know Why Is Investing in IPOs Attracting Retail Investors? Also, What are the 5 IPO Mistakes that Retail Investors Must Avoid?

Why Is Investing in IPOs Attracting Retail Investors?

The momentum continues in 2022. May 4th this year marked the launch of the largest IPO in India. The Life Insurance Corporation of India (LIC) launched with an initial public offering at $2.7 billion in the Indian share market. Other names like Oyo, Boat, PharmEasy and Ola may also go public this year.

This trend has created a frenzy among retail investors wanting to get their skin in the game early on, with companies having solid fundamentals. Nothing wrong with that if you adopt a disciplined approach to investing in IPOs. Subscribers to public offerings must vet the viability of the business, including gaining insights into their offerings, competitive landscape, and future growth opportunities.

Most importantly, you must determine the prospects of the opportunity based on the probability of aligning with the reality of what it can deliver in the future. Investors should also consider the element of risk that all market-linked asset classes are prone to.

What are the 5 IPO Mistakes that Retail Investors Must Avoid?

Are you convinced that investing in initial public offerings in India is the right path for you? Here are 5 IPO mistakes retail investors should avoid if they choose this route to investment.

1. Not Researching Enough

Investing in IPOs is no different than purchasing a stock already listed in the market.

In addition to the individual research you undertake, follow your regular checklist – are the business fundamentals strong, are they steadily growing their revenues and market share, is there strong management at the helm and so forth.

You can find company-related information in the annual performance reports. Moreover, all companies that aim to go public release the draft red herring prospectus (DRHP). It is the only document companies release before launching their initial public offering.

2. Ignore Company Valuations

When you go down the IPO investment journey, it is essential to have an accurate valuation of the company. Often investment bankers quote a high valuation at the point of listing. But unfortunately, it leaves very little room for retail investors.

Assessing the valuation lets investors pay the right price to own the stocks, which could be at the IPO level or later when the stock is already listed. Compare the valuation offer with its immediate industry peers who are already listed. It will help you understand if the listed price is undervalued, fairly valued, or overvalued based on the industry parameters and profitability ratios.

3. Don’t Think Short Term Only before investing in the IPO market in India

If your only objective is to make a killing in the short term, then it’s essential to have an exit strategy in place. But, first, you must consider at which stage you should let go of your stock to book profits. 

That said, the usual behavior post launching an IPO for stable companies is to list at a high price and then go through a market correction over the next few months. So if you are looking to flip and exit within a few days of the IPO launch, you must have your exit strategy in advance. 

Retail investors should also remember that short-term returns aren’t the only possibilities with an IPO in India. You can also choose to run with it long-term, which could generate far greater value. 

4. Not Waiting Out the Lock-In Period

Lock-in periods range from 3 to 24 months, where neither the stockbrokers nor the underwriters can sell their stake. After that, it is a legally binding contract with the company.

From an investor perspective, it indicates that if the brokers or the underwriters are still holding on to their share of stocks well past the lock-in period, it signals the company has a bright and sustainable road ahead.

Since the insiders have complete faith in growing their investment with the company, it may be a worthwhile investment to make in the company too.

5. Disregarding Brokers Associated with the IPO

Check if the IPO-bound company has a strong underwriter. Good-quality companies will always rely on strong brokers to bring them into the public domain as it helps build investor confidence.

On the other hand, if the IPO-bound company has smaller brokerages underwriting it, you may want to tread cautiously. Companies working with small brokers will also attract a smaller client base. It can be an advantage to investors as there will be less competition when investing in pre-IPO shares. 

The Bottom Line

Is investing in IPOs the right strategy for you? Only you can decide that. First, do your research, analysis, and planning. Then, wait for the right time to jump in or exit. Sometimes, the time could be suitable during the IPO, or at others, it is better to wait. 

When handling the IPO market, the secret sauce comprises assessing, organizing, and progressing towards a perspective with the available information to evaluate weaknesses. Then, if you get your assessment right, you may have a champion.

Read more: How Long term investing helps create life-changing wealth – TOI 

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