IPO Investing: IPO Investing Guide: 3 Golden Rules Beginners Should Follow

The previous fiscal year was a year full of initial public offerings (IPOs) in India. High-volume public offerings, participation of newer companies, and blue-chip listings have fueled appetite for IPOs, especially among Indian retail investors.

The IPO craze has been a major contributor to the rapidly growing number of demat account holders in India.

While IPOs offer investors an opportunity to invest in a solid business, the offering price alone should not require a subscription. Just like investing any stake in an already listed company, the decision to go for an IPO should be a derivative of the overall analysis.

From fundamentals to finance, it is essential to understand the different aspects of the business before reaching the point where an investment decision needs to be made.

Even at this point, it is all deposited in the strength of one’s perspective and its potential alignment with the reality that the future holds.

However, at a high level, there are three criteria that will help beginners gain a solid foothold in the public display.

An IPO is nothing but an offering of a company’s shares which roughly means the right to participate in the potential growth (or decline) in a company’s value.

Just as one begins evaluating the viability of any business idea, evaluating a company associated with an IPO begins with an understanding of the products/services offered by the company, the competitive landscape, and business growth prospects.

You should look for reasons to believe that the company providing a quality product/service will continue to generate meaningful sales growth, while maintaining significant control over product pricing.

Now, there may be a number of factors that influence the strength of your view on the above hypothesis. This depends on the nature of the business and the environment in which you work.

Some of the common factors that apply to most companies include market share, product/service substitution, susceptibility to changes in the political, regulatory, technological and any other applicable environment.

Besides business, it is necessary that the financial position of the company also grows and strengthens at a reasonable pace or higher.

The company’s financial condition is also an insight into the business’s effectiveness, efficiency, and prospects. Different companies operating in different environments offer unique financial advantages.

These financial advantages should be viewed in the context of the unique situation of the business, and in comparison to peers operating in as similar sectors as possible. Most financial features are metrics in a company’s financial statements.

Some examples of financial metrics that have been extensively analyzed include revenue growth, profit margins, expenses, and a variety of applicable ratios.

Now, this is difficult. A good starting point would be to compare the applicable ratios with those of peer companies operating in the same sector and already listed while making adjustments for their unique context.

The most common evaluation metrics are ratios such as price/earnings and price/sales. Now, the subject of evaluation is as much an art as it is a science.

Every company is unique and requires a unique rating and there is no telling that a company that gives a lower rating than its peer makes it more attractive.

The analysis of this ratio should serve as an indication of how the company is positioning its value against its peers, and work should be done whether the distinctive nature of the work justifies the deviation?

There are a number of ways to arrive at the right IPO investment decision but only a few of them will be completely incorrect.

Investing in underlying subscriptions or gossip, as a gamble to include winnings or the basis for sensational media coverage of the show are the ways to top the incorrect list.

While there is a lot of comprehensive analysis of an IPO, a beginner should strive to build a strong perspective and conviction at the same time while identifying the market and reflecting the actual strength of the investment thesis.

The secret sauce is to access, assimilate and form all available information relating to the matter, while constantly assessing the weaknesses of one’s own cognition.

(The author is Co-Founder and Head of Business, Fisdom)

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