2021 is set to see a whole lot of initial public offerings (IPOs). Companies both young and old with a massive net worth are offering shares to the public for the very first time. The IPO of around 83 companies from a variety of sectors — steel, hotel, cement, hospital, and more — has scheduled their IPO for the remaining part of the year. But what are IPO investments? To start off, let’s define what an IPO is.

What is an IPO?

An IPO or initial public offering is the initial sale of shares on a publicly-traded stock exchange by a company that was formerly private. IPOs are also referred to as a company choosing to ‘go public.’ It is the company’s private equity investors as well as its founders who gain the most through IPO investments. The reason these two parties make significant gains is that, in the initial few minutes where trading begins, a stock’s price can spike by anywhere between 20% to 50% or more than that. This implies that, even if you choose to place a buy order prior to the market opening, you will still be buying into your IPO investment at a higher price.

How to Find A Good IPO?

Companies that are choosing to go public through their IPO do so for debt repayment, acquisitions, working capital, and a slew of other reasons. When IPOs are overflowing across equity markets, finding the perfect IPO to invest in can be challenging, especially if one is not aware of when to invest after selecting the right one. According to investment experts, the procedure of identifying a good IPO is quite similar to spotting a good equity investment.

In order to do this, one needs to analyze and study the promoter history, company valuations, the business model, and more, so one can make an informed decision. Very often first-time investors find themselves making the error of investing after following the herd rather than conducting their own research. Typically, the IPO shares that are higher quality come at a substantially higher premium compared to their peer’s valuations.

In fact, in many cases, IPOs that are investable are usually oversubscribed, which makes it cumbersome to receive an allotment for the same. Thus, investors find it best to simply stand by for the valuations to turn justifiable since the market has a history of correcting its directionality, every once in a while. If you are seeking to invest in a company without any history, here are ways to identify a good IPO:

  1. Understand the company’s business model, financials, and management

Prior to selecting a certain company to invest in, investors need to understand the company’s policies, core values, and objectives. In fact, it is vital that one learn about whether the company is the leader in its market or if its industry classifies as competitive. Investors must also know about the company’s credibility through their promoters, qualifications, management team, and more. This will offer investors all of the relevant information regarding the IPO, and it will help to decide whether the IPO is worth investing in or not.

SEBI — also known as the Securities and Exchange Board of India —  requires that all of the companies who wish to go public should file a draft red herring prospectus (DRHP) with SEBI. The DRHP is a document that serves as the best source not solely for financial information, but also for other non-financial information about the company. Although this process might seem time-consuming and tedious, it is always advisable that one read the fine print that has been provided by their company.

  1. Considering the company’s track record

Although this data might not be available for every company, it is a soft protocol for investors to consider aspects like the market growth opportunity within which the company is currently operating, it’s positioning as well as how competitive its landscape is. Things like promoter shareholding both pre and post IPO, and the company’s management track record, in accordance with private equity participation all help investors assess the background of a company.

It’s also recommended to look at the topline growth strategy, the scale and revenue of the company, its quality of earnings, return ratios, and capital structure. Keep in mind that while it can become difficult to analyze the new listing’s financials, given the limited availability of a new company’s past financial record, studying financial statements to the best of one’s capabilities is always advised by professionals.

  1. Using Market Watch

A third crucial factor when it comes to selecting an IPO is to figure out its overall demand from investors. Following this, it is recommended that one gauge whether one’s stock price will be available at reasonable valuations. According to experts, the ideal IPOs to invest in are those that are industry leaders while being in a unique position of offering an in-demand service. Such companies tend to be positioned to outperform most in the long term, and they go beyond merely providing gains on the listing-day itself.

The Bottom Line

IPO shares can make for profitable investments. If one is looking to invest in an IPO, start by filling out an IPO application form. Such forms are typically available for free with stockbrokers. Through the help of online stockbrokers, IPO shares can also be applied online. The process of applying for an IPO investment is a timely one in many cases. For whatever reason, if one fails to secure a sizable allotment during their IPO, another key moment to invest in a newly listed company is when the stock’s prices undergo a correction.