Investment in IPO – How to Minimise the Risk Involved?
Companies follow different approaches to raise funds for business growth and sustainability. One is issuing an IPO to obtain funds from investors/shareholders. Investing in an IPO allows traders to get hold of company shares early. Investors can either choose to hold shares or sell them for a profit. As with every other investment, IPOs also have a few risks. As an investor, you must address the risks of an IPO before placing your money. You must not be complacent after buying company shares in an IPO. There’s no guarantee that a company will only move upward after launching an IPO. Read on to understand how to minimise the risks associated with IPO investments.
What do you know about IPOs?
Before investing in IPOs, you must understand how they work. Private companies can become public with the help of IPOs. By launching an IPO, a private company distributes its shares to the common public for the first time. After an IPO, the company becomes public, and the remaining shares are available on stock exchanges. A private company might liquidate its shares or ask the shareholders to free some stocks. The tradeable shares are available for the common public via an IPO. Anyone with a trading and Demat account can invest in IPO, from retail to institutional investors. However, there might be a band size for investing in an IPO, the minimum number of shares one can buy.
To launch an IPO in India, companies rely on permission from SEBI (Securities and Exchange Board of India). Private companies have to file a Draft Red Herring Prospectus (DRHP) with SEBI to get a permit for an IPO. By checking the list of upcoming IPOs on the internet, you can know which companies have been permitted by SEBI. The IPO comes with a fixed price for each company share. Once the IPO is over, the price of shares on stock exchanges will depend on company performance and market conditions. You can buy shares at the floor price in an IPO or place bids to get shares on a preferred basis. Let us check out some tips to invest in IPOs and earn returns.
Minimising risks involved with IPO investments
To ensure that you invest in upcoming IPO without risks, here are some tips:
Indulge in market research
Making intuitive investment decisions that aren’t backed by research might backfire. The same goes for IPOs being launched in financial markets. You cannot invest in an IPO without understanding how the company works and generates profits. You must perform market research to know whether the company has the potential to grow. Retail investors might fail to perform market research themselves before investing in IPOs. Luckily, they can rely on new-age trading platforms to identify profitable IPOs in India.
Read the DRHP before investing
As discussed above, a company must submit a DRHP with SEBI to get approved for an IPO. You can visit the online portal of SEBI to access the DRHP of a company. Once you go through the DRHP, you will understand one or two things about the company. For example, you can know the company history, common risks, capital usage plans, and more by reading the DRHP.
Understand how the company will use your money
When you invest in IPOs, you must know where your money is going. Companies tend to explain how they are going to use the funds raised by an IPO in the DRHP. Sometimes, they make the information public while launching an IPO. Companies using the funds for business expansion, R&D, or innovations might offer high returns to investors.
Determine your risk tolerance
Nothing is fixed in the share market, as disruptions exist. You must buy shares according to your risk tolerance level for the same rationale. Don’t invest more than your capacity, and have a backup plan.
Don’t forget to check the lock-in period
Some IPOs might come with a lock-in period for traders. You are not supposed to sell the shares before the lock-in period. Since it might be an issue for short-term traders, it is better to check it beforehand.
When investing in a current IPO, you must address all the risks. You can always depend on a trading platform to perform market research and choose a profitable IPO. Don’t forget to invest according to your risk tolerance level to avoid mishaps. Invest in current IPOs now!
You must be careful when investing in Indian IPOs. You must understand how the company works before giving it your money. Understanding more about the company and conducting market research before investing in an IPO is better. Don’t forget to read the DRHP before investing in an IPO!