It’s that time of the year when we make resolutions and strictly abide by them. After all, these resolutions are in our best interests.
One of our key takeaways from 2020 is to maintain good financial fitness. It enables us to overcome the rainy days, while we can also make the most out of any market opportunity. For instance, the benchmark indices have grown more than 80% after they bottomed out last year. Several stocks grew multifold with some even growing as much as 70x and beyond. But how should you go forward? What should be your strategy?
A great way to enter into 2021 is with Initial Public Offerings (IPOs). So, let’s have a look at what is an IPO and how you should go about them.
What is an IPO?
An Initial Public Offering, popularly known as an IPO, takes place when a company needs to raise money. It releases some of its shares for ‘public’ investments which are purchased at an ‘issue price’. This fundraising could be for anything from business expansion to other strategic initiatives. The company reveals all such details in its Draft Red Herring Prospectus (DRHP), which is an initial registration document submitted to the regulator (SEBI).
The DRHP explains everything from the company’s financial standing and business prospects to its liabilities and why it wants to raise the money. Any interested investor can go through it and choose to participate in an IPO accordingly.
Are IPOs profitable?
IPOs are looked upon by investors with two investment horizons, i.e. with a short-term and long-term perspective. Though there are incentives in the short-term, any new investor should focus on the bigger picture with a long-term outlook. But how good are IPOs anyway? Data speaks volumes in this regard.
In the past 3 months, a total of 9 IPOs have taken place in India. Some of the recent ones include Antony Waste Handling Cell, Mrs. Bectors Food Specialities, Burger King India, and Gland Pharma alongside others.
November’s Gland Pharma (issue price: Rs. 1,500)is currently trading at more than Rs. 2,400 while December’s Burger King (issue price: Rs. 60) is trading at over Rs. 170. Mrs. Bectors Food Specialities (issue price: Rs. 288) is currently trading at more than Rs. 500.
However, you should not just go ahead and put your money into an IPO without doing a proper analysis. It is because there is also a flipside to it. For instance, Net Pix Shorts Digital Media (issue price: Rs. 30) has effectively delivered zero returns to its investors and is trading around the level of Rs. 30 itself. Similarly, October’s Bodhi Tree Multimedia (issue price: Rs. 95) has corrected to Rs. 77.50 after peaking at Rs. 96.
What should you do then?
If you’re completely new to the stock markets, just make sure that you read up as much as possible on upcoming IPOs. Learn to study DRHP. You must completely understand the business model of a company that you’re planning to invest in. DRHP should become your bible.
Take the help of cutting-edge brokers as they issue IPO-centric advisories with their data-driven methodologies. It will offer you great clarity with relevant metrics. You must particularly check the subscription rate on the second day of an IPO. If the subscription is good, it is likely to deliver great returns. A good subscription means that the IPO has either been oversubscribed or is on verge of getting oversubscribed.
Overall, this practice will eventually help you graduate to the equity market with a strong understanding of fundamentals. The price action (the way the stock price will tread) of an IPO is relatively easy to understand than listed stocks. You’ll be able to identify what factors work in a company’s favor and differentiate between true value and speculation. The best part is that you will be making sturdy returns while learning to trade.
Remember, stock markets around the world have only grown and breached previous all-time highs even after the most rigorous financial overhauls. It is only logical joining them nowand making IPO investments a part of your New Year resolution. The sooner, the better!