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How to invest in IPOs and get it right; 6 amazing tips to profit from

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Published: October 16, 2017 3:22:51 AM

From credibility of promoters to foreign collaborators to project and product details, check each of these in the Red Herring prospectus before betting your money on an initial public offer.

An Initial Public Offering (IPO) is a securities transaction wherein a company’s shares are offered for public sale for the first time.

An Initial Public Offering (IPO) is a securities transaction wherein a company’s shares are offered for public sale for the first time. This move could change the status of the company from being a private-held firm into a publicly-held firm or from unlisted to a listed firm. During the current calendar year 2017, IPOs worth around Rs 11,200 crore are going to hit the market. Since, it is not a good idea to invest in all the IPOs, let us discuss certain guidelines to be followed to make money from IPO.

Promoters’ credibility

Check promoters’ past performance regarding the companies promoted by them earlier. If those firms have done well, then chances of the new one doing well are also high. Integrity of the promoters should be checked with financial newspapers and magazines. Their qualification, experience and knowledge in the related field need to be considered.

Project details

Look at the credibility of the project appraising institution and its stake, if any, in the forthcoming issue. Avoid investing in a company which is not ready to start its business operations. This will help you avoid investing in companies, which may have long gestation periods before actual commencement of business operations. Efficiency of the management The composition of the board of directors should be studied in detail to find out whether the board is broad based and consists of professional people and adequate number of independent directors have been appointed.

Product

Companies introducing a new product / service or industrial process for the first time, companies proposing to manufacture a product which is currently being imported, companies introducing a technologically advanced or better quality product, or companies venturing into new areas are likely to be better and more lucrative investments. Invest in companies that have innovative products or service.

Foreign collaborators

If the company has any foreign collaborator, either for technical help or to buy finished products, check their reputation and market standing. Companies where the foreign collaborator has an equity stake are often considered as good investments. Foreign collaborators do not readily opt for an equity stake in any company unless they are confident of the bright prospects of their counterpart.

Mega IPO issues

Apply for the mega issues of well-known and profit making companies. The sheer size of such issues ensures higher chances of getting a firm allotment. The bigger the size of the issue, the better will be your chances of getting a firm allotment. To conclude, it is hard for a novice investor to analyse an IPO. However, they should look at the Red Herring prospectus to elicit majority of the information we discussed as above.

The writer is professor of finance & accounting, IIM Shillong

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