Every business needs capital for various reasons, ranging from funding its operations to servicing its financial obligations; companies are no different. While a privately held company can have several sources of capital, a public company has access to more avenues to raise capital.
This is one of the main reasons why companies decide to go public through an Initial Public Offering (IPO). Every month, you are likely to find various companies on the IPO list of major stock exchanges. In this article, we shall discuss how to evaluate an IPO investment and decide whether to invest in it.
What is an IPO?
An IPO or Initial Public Offering is the first public issue of a previously privately held company. When a company decides to get listed on a stock exchange and have access to public funds, it initiates the process of an IPO.
There are two major types of IPOs companies can choose from, namely, a Fixed Price Issue and a Book-building Issue. In the former type of IPO, the offer price of the shares is fixed. In the latter IPO type, there is a price band for the shares on offer instead of a fixed price.
Major Factors to Consider Before an IPO Investment
While some of the companies announcing their Initial Public Offerings may be established entities with a strong long-term financial performance, other companies may be relatively new in their particular industry. In order to determine whether a prospective IPO investment is ideal for your investment portfolio, you must thoroughly analyse the IPO as well as your investment goals. Here are the major factors you must be mindful of before selecting an IPO investment.
- The Objectives of the Issuing Company
While evaluating an IPO investment, one of the first factors to keep in mind is the nature of business and objective/s of the issuing company. Assessing the aforementioned information can help you determine whether the company is a suitable addition to your investment portfolio.
- The Fundamentals of the Issuing Company
The next factor you must consider in a potential IPO investment is the fundamentals of the issuing company, including their revenue, profit, cash reserves, liabilities etc. You can easily access the pertinent financial information on the company’s website. The Draft Red Herring Prospectus for the IPO would also have the relevant information.
- The Management Team of the Issuing Company
Another significant factor to evaluate in an IPO investment is the core management team of the issuing company. It is the top management of any company that drives all the decision-making and execution. Therefore, a company that has qualified, experienced, and credible individuals in its management team can be a worthy conduit for investment.
- The Reasons Stated for the Company Going Public
A company may be issuing an IPO for various reasons – to enhance its investor pool, to fund its future projects, to service its financial obligations, etc. It is important to gauge an IPO investment on the metric of the intended usage of the funds. Should the issuing company be raising capital primarily for debt servicing, the IPO is not a worthy investment.
- Your Investment Goals and Risk Appetite
While assessing an IPO investment on the various parameters pertaining to the issuing company, it is also critical to adjudge whether the investment is in alignment with your investment goals. Factors such as the industry in which the issuing company operates, the relative market standing of the company, its projected growth prospects, and the risk associated with investing in it should be considered. By doing so, you can ascertain whether a potential IPO investment is to be selected.
The Bottomline
Since there is no dearth of IPO investments you can choose from the IPO lists every month and year, it is pivotal to choose the one/s that are feasible investments and in line with your investment goals and risk appetite. You can apply for an IPO through your demat account, and enjoy a seamless investing process.
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