Many initial public offerings have rocked the capital markets over the years and from the available facts, it can be said that the listings have been decent in many cases, thus making good wealth for investors. There are many misconceptions regarding IPOs and hence, most investors are not able to get maximum benefits from them. Buying IPO stock is done either for listing gain purpose or for holding the stocks for several years to get good long term returns. There are many things which one needs to consider before buying IPO stocks and most important is the basic concept of IPOs.
The IPO process helps corporations to list themselves on the stock exchange and become publicly traded companies. The modern business environment is extremely competitive and firms need more and more cash to finance their business operations. It may not be possible for firms to seek bank loans every time. So, having a good equity capital always helps to help a company achieve its financial goals.
The money raised from IPOs mostly goes into acquisitions, mergers and purchase of goods for generating more business. By bringing an IPO, promoters of the company sell their stake to the common public at a price which is arrived by valuation study. A price band is given to the investors and they have to bid for the shares and apply for at least the minimum number of shares mentioned in the IPO prospectus.
IPO investors can get good returns provided the shares of the company list at a premium to the issue price. There are many factors which determine the success of an IPO. Here is the list of these factors:
- Reputation and previous track record of the promoters
- Business model of the company
- Financial strength of the company
- Response to the public issue from retail investors, high net worth investors and institutional investors
- Ratings given to the IPO by renowned rating agencies and brokerage houses
Buying IPO Stocks
In order to buy IPO stocks, you need to have a trading account. For this, you will have to approach your local stock broker and complete all the formalities. Make sure that the stock broker is a reputed one who can also guide you through the IPO application process and help you know which IPOs are worth investing and which are not.
Conducting a self research is an important step in buying IPO stocks. Remember that the activity of purchasing stocks is simple, but identifying whether the IPO is good or not is tough. You need to personally go through the balance sheet, profit and loss account and past performance of the company to decide whether the company will use the IPO money wisely. Check how the other group companies of the company proposing the IPO are performing.
Another thing to consider is the valuation at which you are being offered the stock by the company. For valuation analysis, you need to compare the net profit, earnings per share and price to earnings ratio to other listed players.
For a successful IPO investment, you need to submit duly filled application form on time. The form contains details such as number of shares you wish to apply for, price of the shares and your account details. Fill in all information correctly and get it checked from your broker. If the IPO has many shares to offer to the investors and is floated by a well-known company, then the chances of getting allotments are very high.
You can learn about the IPO stocks to watch and IPO stocks list by visiting web sites of stock exchanges and brokerages. After reading this article, I am sure that you have definitely understood how to buy IPO stocks. IPO investments have made many people millionaires and so you should definitely give it a try. Good luck!
DISCLAIMER: This WealthHow article is just for reference purposes and do not in any way recommend any stock market transactions.