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Investing in IPOs for the First Time? Key Things to Check Before you Buy

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Several IPOs are set to be floated this year

As much as companies are trying to float IPOs, many new investors are getting interested to invest in them, going with the flow

  • Last Updated:February 04, 2022, 15:46 IST

India has over the last year seen a massive wave of companies floating their initial public offering (IPOs) and seeing unprecedented responses. After a year of witnessing the boom and record investments, dozens of startups and companies are lined up at the Dalal Street to get listed there. So far, as many as more than 30 IPOs are waiting for a nod from the Securities and Exchange Board of India and some companies are under the observation of the market regulator. The LIC IPO, touted as the biggest one in India till date, is also expected shortly the government has indicated.

As much as companies are trying to float IPOs, many new investors are getting interested to invest in them, going with the flow. However, there are a few things that young investors should keep in mind before investing in IPOs this year.

Here are the Key Things to Remember Before Investing in IPOs

  1. Do Background Checks: It is always important to read the company’s past before investing in any kind of stock, especially an IPO. Before investing, you should always check the company’s financial history and understand the potential of its growth. This will also shed some idea why the relevant company is floating the IPO.
  2. Read the Red Herring Prospectus: Before floating a public offer, companies have to mandatorily submit a Draft Red Herring Prospectus (DHRP) with market regulator Sebi. Here, the company gives details on how it plans to use the proceeds from the IPO and also sheds light on what the risks might be.
  3. How Proceeds are Utilised:  If the proceeds are used to repay debts of the company entirely, it is not advisable to invest in the IPO. However, if the company uses a part of it for general corporate purposes or raise further funds, investors can be assured that there is a prospect of growth.
  4. Check Valuations of Company: Before investing in your IPO of choice, you must go through the valuations of the company. The offer price may be undervalued, overvalued or rightly valued, depending on the parameters of the industry. Also, it is important to check the financial performance of the firm over the past few years. If it is doing good in terms of performance, investing in that IPO might be a good choice.
  5. Investor’s Intentions: It is always important to understand what you as the investor want from the IPO. If your investment horizon looks out for quick profits and not holding the shares for long, you should choose the IPO accordingly depending on market sentiments. You can also opt to choose an IPO with a long-term profit, which will depend on the how the company establishes itself with its strategies. You should not go with the flow just because an offer is being hyped.

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