Things to remember before investing in IPOs

Initial Public Offerings or IPOs are shares of a privately owned company that are offered for the first time to the public to invest in. Most companies looking to go public tend to present a rosy picture of the prospects of the company, and it’s earning potential.

In today’s age, however, investors are more aware of the risks of making uninformed or hasty decisions in the hope of making a quick buck. With numerous companies entering the stock market, finding an IPO that provides long-term gains can be difficult. There have been several cases recorded where people have experienced big gains only during the initial days of the company going public.

The search may feel difficult, but certainly, it’s not impossible. Here are things you need to remember before you put your hard-earned money into an IPO:

  • 1. Research well: Finding information on companies who are about to go public is crucial. Do an online search for information on the company, its competitors, their financing, past press releases and overall industry health. Learn as much as you can about the company as this is a crucial step in making a smart investment.
  • 2. Always read the prospectus: Never skip reading the prospectus, because it’s the prospectus that lays out the company's risks, opportunities, and the proposed uses for the money raised from the IPO.

For example, if the share money is for repaying loans, or buying equity, then beware! But if the money is going toward research, marketing or expanding into new markets, then that is a good sign for you to invest. Also, read all the accounting ratios and figures carefully.

  • 3. Be cautious: When dealing with the IPO market, be a sceptic, question everything. With the information being scarce, there is always a degree of uncertainty surrounding IPOs. If your adviser is strongly recommending shares, then there is probably a reason for you to exercise caution before investing.
  • 4. Consider waiting for the lock-up period to end: A lock-up period is a contractual restriction which prevents insiders (large shareholders, company executives) who have acquired company shares before it went public, from selling the shares for a stated period, after it goes public.

Wait till they are free to sell their shares, because if they continue to hold their shares once the lock-up period has expired, then it is an indication that the company has a bright future.

Remember, when it comes to the IPO market, being well-informed is key!