Investing in IPOs: 5 IPO Mistakes Retail Investors Should Avoid Making

There has been a gold rush in the Indian IPO market lately. In 2021, the companies raised approximately Rs 1.2 crore of capital via the IPO stream.

It is well above the total capital raised between 2018 and 2020, which was just over Rs 73,000 crore. Technology startups, e-commerce companies, SMEs, etc. have been pioneers in this field.

The bullish IPO market also renewed investors’ interest in the market.

Along with experienced investors, first-time buyers are also venturing into the space in large numbers. The increasing digitization and transformation of the fintech space has also accelerated the growth saga.

Meanwhile, it is important to have a good knowledge of the market. Just like any financial instrument, achieving sustainable returns from an IPO requires scrutiny of market conditions and making informed decisions.

Here are some tips that can help an investor increase returns without compromising the safety of his investment.

1. Don’t rush, do the basic research right
As a foundational step for determining a good IPO, in-depth research about the company is necessary. Research scope should include but not be limited to past history, financial health, industry analysis, competitive intelligence, etc.

discerning investors should also consider the future of the company and its growth roadmap.

2. Don’t invest without knowing the business model
You should not invest in a company without knowing the business model at hand. Both the created project as well as the new project requires a robust business model to operate.

The company’s business model includes knowledge of products (and services), target audience, and future prospects.

Having an idea of ​​the business model can help the investor assess whether or not the company can turn a profit in the foreseeable future.

3. Do not lose sight of the underwriting evaluation
The valuation of the IPO is the most important quantitative criterion. It is evaluated with the help of discounted cash flow, stock market trends, past financial statements, performance in relation to peers in the same industry, etc.

The higher the IPO valuation, the higher the demand. Meanwhile, retail investors should keep in mind that IPO valuation cannot be the only criterion. There have been numerous cases in the past, where the values ​​then went down despite the initially high ratings.

4. Don’t play too loud in a declining market
As a general rule, one should avoid investing in a declining market. If the market is bearish and other analysts and industry experts believe the decline will continue, one should avoid investing in an IPO. Chances are high that the IPO will not yield significant returns in the near future.

5. Do not rush to sell on the day of listing
In general, selling on the day of the IPO is a rule of thumb, as it can bring in significant returns. However, it has been observed that due to the rush on the day of listing, the prices are corrected. Hence, it is advised to wait a day or two rather than sell on the listing day itself.

(The author is Vice Chairman of GCL Securities Limited)

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