With multiple Initial Public Offerings (IPOs) being launched continuously, there is quite a buzz in the financial markets. This is because of the fruitful listing of companies in recent months. With such an increase in IPO launches, is it wise to subscribe to them all? Let us take a deeper dive into this issue.
- Indulge in factual research
It is quite a task to gather valid research on companies that are going to go public. It is easier to find information on publicly traded companies when compared to private companies. Analysts dissect public companies well enough, but the private players only disclose the information that they are okay with being in the public domain. Even the information in the prospectus is created by the private company and not by a third party behaving in an unbiased capacity.
Yet, there are ways to ensure you can do a decent background check. Use the internet to your advantage and find out relevant information about the company set to take out their IPO, their competitors, company health, press releases etc. There is a possibility that you will not find much but whatever little information you can glean, will be beneficial. The data at your disposal will aid you in deciding if it is wise to invest in an IPO, or if the value of the company is being blown out of proportion.
- Look out for capable brokers
An important point to focus is the brokers that are bringing the company public. Underwriting companies is an important job, and smaller brokers are notorious for underwriting any company that approaches them. Hence try to look for a broker with a strong reputation and a record of bringing in successful IPOs.
Yet, there may be times when it is wise to follow a small brokering firm. Smaller brokers have a limited client base, hence it is not quite cumbersome for investors to buy the pre-IPO offerings. Larger brokers do not like an individual investor’s initial investment to be in an IPO. Old and rich independent investors are allowed to invest in IPOs in larger firms.
- Read the prospectus like a holy book
Even though you should be wary of what is written in the prospectus, it is still wise to read it thoroughly. It contains data on the risks, opportunities, and anticipated use of the money being raised. Look out for red flags such as raised money being used to pay-back loans or even the purchase of equity from the founding members. It is never inspiring if a company cannot pay back loans if they do not issue new stocks.
Alternatively, if the company seeks to use the raised money for research and development or even expand into other markets, then this is a deal you could get behind. Look for a realistic picture and not just optimistic estimates in the prospectus. Pay particular attention to the accounting information to decide if this IPO is worth your investment and risk.
- Exercise caution
Cynicism is always advisable when considering an IPO investment. With the lack of information about IPOs, it is best to tread lightly. Even if the IPO is being recommended by your own broker, it is exceedingly important to be cautious in your approach. Most times, individual investors are offered the rejected stocks that the moneyed and rich investors have declined to invest in. Always try to ascertain why your broker is trying to get you to invest in a particular IPO. Brokers have a habit of saving the best of shares for their moneyed clients, so unless you fall in that category, you might be offered a dud.
- Let the lock-up period end
Wait till the insiders are ready to sell their shares. You cannot ascertain in the lock-up period if the investors are satisfied with the spot price. The good companies continue to do well once the lock-up period expires, hence it is always a good idea to wait it out and let the market settle.
Truth is that subscribing to IPOs can go either way, for retail investors it is a game of chance, especially when choosing these IPOs with limited knowledge. When choosing IPOs, the quality of the prospective company is of the utmost importance.
