Navigating IPO Investments in India: A Beginner's Guide

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The year 2023 saw 57 IPOs offered by companies, and a record amount of capital was raised through IPO investment. An IPO or an initial public offering is a popular form of investment in India, and several investors have witnessed the fruits of investing. Nonetheless, if you are new to the arena of IPOs, you may need a guide to help you explore the IPO market and navigate it carefully. As there are so many IPOs out every year, you may need clarification as to how to invest and more importantly, what you should base your investment decisions on.

Understand IPO Investment

When a company is not listed on any stock exchange, it is known as a private company. The process that a company goes through to get listed is known as an IPO. So, a private company issues an IPO or initial public offering to permit its shares to be invested by the public and then get listed on stock exchanges for public transacting. Private companies issue shares to the public for the first time through an IPO and they may do this as they wish to raise capital for company expansion, or other reasons. You may invest in an IPO because you believe a particular company has the potential for growth and want to be a part of its growth story, earning profits from its shares in the bargain.

Now, in the IPO market, several IPOs may get launched simultaneously, so what do you base your choice of investment on? How do you choose a company to invest in? Do you require an IPO investment strategy to make an informed decision? If you consider planning to choose your IPO according to some key factors, then this may be a strategy worth considering navigating the confusing IPO market in terms of sectors and companies issuing IPOs. Before we get into the ways to make smart IPO investments, you should gain some basic knowledge of how IPOs are issued.

IPO Investment - Basics Explained

An IPO is issued through a subscription process that investors have to apply to. They can request a certain quantity of shares to invest in an IPO and the company issuing the IPO allots these shares to the investor applying for it. Share allotment may take place or not, and is up to the sole discretion of the IPO-issuing company. So, although you may submit an IPO application, you may not be allotted shares in the company or maybe allotted a limited amount.

Smart IPO Investments - Smart IPO Decisions

In the process of pre-IPO investing, that is, before you decide on any particular IPO investment, there are some factors of IPOs worth considering and these can act as a guide in your investment choices:

  • Read the Prospectus

Any company that issues an IPO comes up with what is known as the Red Herring Prospectus. This is a document that is mandatory for a company to generate with its IPO. It tells investors all about the company issuing the IPO in terms of its financials, past performance, business model, prospects, etc. The prospectus gives you insights into a company and this helps you to make a choice.

  • Pay Attention to Details

While scrutinising the Red Herring Prospectus, certain details could drive your IPO investment. For instance, a positive sign to invest may be that a high percentage of shares are owned by banks and institutional investors, showing general confidence in the said company. You can read the prospectus of any company on the website of the Securities and Exchange Board of India (SEBI).

  • IPO Promoters

When a private company wishes to issue an IPO, it hires an investment bank and promoters to guide it in its issuing process and to see the IPO to its logical conclusion. Promoters act as entities that support the IPO from beginning to end, till a company gets listed. While selecting an IPO to invest in, it is worth considering who the promoters are. Promoters that have reputed names make the IPO credible, and they tend to give a premium to the IPO price.

  • Understand the Company - Understand the Sector

When you invest in any company through its stock, whether it is via the IPO investment route or the direct stock market, you should grasp every detail of the company you are investing in and its sector. Once you have a thorough understanding of the business you are investing in, you can gauge whether your investment may be considered worthwhile.

Final Lines on IPO Investment

There is no real IPO investment strategy to follow when it comes to IPO investments. To borrow the words of Warren Buffet, you should “invest in the business you understand” so you have a good idea about the company and its prospects. IPO investment, like any other investment, may reap rich rewards but also fall flat, so you have to invest after careful consideration.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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