Understanding the investment terms can be challenging for a beginner. To help you with the most basic term, which is IPO, then we have covered the basics of it in this article. An IPO (Initial Public Offering) is the process whereby a private company raises money from the general public for the first time by issuing shares.
This money is then used for expanding the business and for other financing activities. Once the IPO process is complete, these shares are traded on the stock exchange just like any other share, and you can invest in them through your demat account.
Factors to Consider Before Investing in IPO
- Analyze the company
As this is the first time issuing, there are no past trends or data that can support your decision to invest. The only way to make the decision is to analyze the company’s financials and read the IPO prospectus to know why the company is going public.
2. Study the sector
Another way to analyze the IPO is to get an idea of where the sector a company belongs to is moving or what the overall market is doing. If the sector is on the rise, then there is a very high chance that the IPO will be a successful one.
3. Know the subscription status
If the IPO is very good, then there are high chances that it will get oversubscribed, which means that there are more bids than the actual issue size. If this happens, then there are chances that you will get lower shares or none at all.
Some Tips for Beginners Investing in IPOs
- Don’t take the decision in haste
If you want to invest in an IPO, do not invest in them in a hurry because these are not any normal shares that you can sell anytime and the money invested will remain blocked for some time. Also, do not invest in them by borrowing the funds because the returns are guaranteed.
2. Don’t invest in an IPO just because it is a big company
If you are investing in an IPO just because it is a well-established company, there are high chances they are issuing it to repay their debt and not for expansion purposes. If this situation comes true, then you may lose a good amount.
3. Open a Demat account if you don’t have one
You can surely invest in an IPO without a Demat account, but if you get the allotment, then you need one. A Demat account is the mandatory requirement to hold the share certificates in them only. Therefore, if you still do not have a Demat account, open one now.
4. Analyze the current state of the stock market
The overall stock market performance and an IPO's performance are closely linked because if the IPO is good and the market is rising, then there are high chances that it will become successful.
5. Buy the shares once the lock-in period gets over
If you don’t want to take the risk and avoid the volatility, then you can buy these shares from the market when the investors sell them once the lock-in period gets over.
Conclusion
Therefore, keeping these points in mind while investing in an IPO as a beginner will surely help you because you may not understand the technical terms, but these tips can work.
