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After the return of boom in the stock market, once again the activity in the IPO market has increased. New companies are coming up with IPOs one after the other. If you are also an IPO investor, then by taking care of some things, you can not only avoid losses but also get strong returns on your investment. We are telling you those 5 things, which must be taken care of before investing in any IPO.
1. Financial position of the company
Before investing in an IPO, find out as much as possible about the financial position of the company offering the IPO. Analyze how the company has performed over the past few years, how much profit it has earned, how much revenue it has earned, and how much money it has borrowed. You should subscribe to an IPO only if the issuing company seems financially strong. You will find information about the company’s financial position in the Draft Red Herring Prospectus (DRHP). This is a document that the company has to file with the Securities and Exchange Board of India (SEBI) to get approval to issue an IPO. You can also visit the company’s website to know its financial position.
2. Promoter in the company
Before investing in an IPO, make sure to find out about the promoters and management team of the issuing company. These are the people who run a company and make important corporate decisions. Companies whose promoters are strong and experienced usually have strong growth potential. The shares of such companies can grow significantly over time and you can get excellent returns by investing in their IPO.
3. Risk and strength
Every company has its strengths and risks. It is very important to do a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis of a company before investing in its IPO. If the strengths outweigh the potential risks, you can place your bid. For example, if a company has a good market share and an efficient distribution network to meet the needs of its customers, its IPO can give good returns.
4. Valuation of IPO
The valuation of an IPO depends on the price at which the shares are first issued to investors. This is one of the most important factors that you should analyze before subscribing to an IPO. If a company’s IPO seems overvalued, it is better to avoid investing in it. However, if an IPO seems fairly priced, you can bid on it to get higher returns. The best way to decide if an IPO is fairly priced is to compare the issue price to the share prices of similar companies.
5. Stock market conditions
Last but not least, you should look at the current market conditions before subscribing to an IPO. If the market is bullish, the IPO can give good returns. However, even the best IPOs end up giving losses or low returns during a bearish market.
