The past few months have seen a sharp rise in market activity where benchmarks have traded at record highs over the past year. The strong liquidity of the economy also fueled the sharp rise in the markets. During this unprecedented market uptrend, investors, especially retail investors, have made huge gains, prompting others outside the ring to join the bandwagon. Capitalizing on the rush of retail investors into the equity market, many companies across various sectors of the economy have planned their IPOs to raise substantial funds to neutralize the virus-induced impact on their businesses as well as to have the funds on hand to grow the business as planned. lines.
According to data available from the Securities and Exchange Board of India (SEBI), the market regulator, August was one of the busiest months for IPO filings. . A record number of 29 companies have filed prospectus projects for public listing, to be part of the continued passion seen in Indian trading houses to capitalize on demand in the stock markets. Notably, the previous record for filing of draft IPO documents by companies with SEBI in a single month was 22 recorded four times – in June 2004, February and December 2006, and in September 2010.
A market report indicates that record deposits in August have capped a steady increase in deposits in recent months. In three of the past four months, a period in which the Sensex has jumped 18%, the number of such deposits has been in double digits.
One of the most salient features of the IPO boom has been the arrival of Internet-driven companies. The virus assault on the economy has drained the capital resources of many businesses, and Internet-based businesses have been no exception. The Market Regulator (SEBI) responded to the changing trend of raising capital for online businesses and relaxed entry standards. Today we have Zomato, Paytm, Policybazaar, etc. as part of this historic IPO boom. Zomato’s successful IPO and profitable listing encouraged other similar companies to follow the IPO route to amortize their capital. Besides online businesses, a wide range of industries beyond online businesses have also suggested selling their shares to the public.
Remarkably, Zomato’s profitable listing caught the attention of retail investors and they began to show a keen interest in taking the IPO route to let their money do the talking. Here it is also noticeable that the low interest rate on deposits in banks was one of the reasons for seeing a change in the investment model of depositors. They are drawn to the rapid gains in the stock market over the past few months and want to reap the rewards. However, most retail investors, especially first-time investors, hardly consider the high intensity risk involved in investing in the equity market. Otherwise, the first task for an investor is to understand how the stock market works and assess their ability to take risk and cut the fabric based on size. It is always advisable to consult professional financial advisers before venturing into the market.
In the meantime, let’s talk specifically about investing in IPOs. Over the past year, IPO returns have indeed been phenomenal, due to the continued uptrend in the stock market. But the real test for the company’s shares occurs when the market is hit and falls into a bearish regime.
As the market is at its peak, what are some things you should keep in mind when investing in IPOs?
The first thing to remember is that an Initial Public Offering (IPO) is a route taken by a company where it is for the first time that it is raising funds from the public for a wide range of activities. The funds raised through the IPO can be used for debt relief, expense financing, business expansion, and other business goals.
For a professional investor who understands the market and the products available in line with his risk-taking capacity, a flourishing stock market presents an excellent opportunity to multiply his investment. But investing in the stock market solely on the basis of hearsay can lead to heavy losses and can even wipe out the capital investment.
You can invest in a company’s shares directly through the primary market, that is, through initial public offerings (IPOs). In addition, there is the secondary market where you can invest in the shares of the company after the IPO.
When it comes to IPOs, we are seeing a kind of festival in the market where several unlisted companies are lining up with their IPOs to raise capital. However, there is a mix of these companies where some have huge brand value in the market and others are not very well known.
As the stock market is currently at its peak, there are some things you need to take care of before investing through IPOs.
You need to know the business of the business and assess its business model to check the potential for growth. Do not invest in IPOs of such companies whose business model is confusing or unclear to you.
It is also very important to have a look at the past performance of the company and to check the credentials of its management and promoters. Here it is essential to know the stability in the management of the business. If you see frequent changes in the management framework of the company, it would be best to avoid investing in the IPO of such companies.
Don’t neglect the fundamentals of the business. There is no alternative to the solid financial parameters of a business. If you are unable to understand financial data, consult a financial advisor and let them analyze company financial data for you. This will help you assess the growth prospects of the business. Only consider companies with strong financial health.
So you need to select such a company with good fundamentals which can allow good returns in the future even if it fails to generate any quotation gains.
What are the risk factors of investing through IPOs?
Investing in the stock market always involves high risk. So it makes sense to educate yourself about the risk factors before investing in an IPO. Let me quote an acquaintance who is a market expert. According to him, âYou may not know the risk of a business just looking at its financial statements. To know these risks, you must carefully read its Draft Red Herring Prospectus (DRHP). Companies mention all the risk factors that could impact their short and long term activities in the HRDC. This may include litigation, contingent liabilities and possible threats that may impact its normal business operations. “
What are the other key things to keep in mind?
The first thing to do is to think about investing in stocks if you have your own funds and the money parking in IPOs is in perfect sync with your financial goals and your risk taking ability. Don’t borrow money to invest. Market experts advise you to try investing in an IPO on the second or third day after opening. This will give you an idea to gauge the audience response. If the show is oversubscribed more than once, the chances of being listed increase.
Finally, if you are using products or services from a company that has gone public, do not make them the basis of your investment in that company. Always consider the basics mentioned above before investing in an IPO of a company.