IPO Investing Tips for a Beginner for Best Returns

Nutan Gupta

23 Feb 2017

Initial Public Offerings (IPOs) are quite popular in India and a lot of people try to make money by investing in IPOs. However, before making any investment in IPOs, one should go through this checklist and answer yourself all these questions:

Is this is an IPO or OFS?

IPO: In initial public offerings, the company decides the price band and the secondary market decides the true price after the stock is listed after analysing the company.

OFS: An offer for sale (OFS) is the way by which stakeholders of a company sell their holding. OFS enables promoters to dilute their holdings in listed companies in a transparent manner with a wider participation through exchange based bidding platform.

Background of the Promoter/Company

  • Check if there are any criminal proceedings against the company or its promoters

  • Check if the company has defaulted in the past

  • Check if there has been any legal complaint against the company or its promoters

Performance of the company in the past

  • Check how long the company has been into the business

  • Growth rate of the company over the years

  • Size of the company

Financial Health of the Company

  • Go through the changes made by the company in accounting policies

  • Be cautious of bloated profits

Financial Ratios

Earnings Per Share (EPS)

EPS is an indicator of the company’s profitability. EPS is calculated by dividing the net earnings by the number of shares in the issue. Investors also tend to calculate the future EPS in order to get an idea how much profit they will earn in the future.

Price to Earnings Ratio (P/E)

The P/E ratio indicates how the company is priced - whether it is cheap or expensive. It is calculated by dividing the share price of the company by it earnings per share. If the P/E ratio of a particular company is higher as compared to other companies in the same sector, it means that the shares are overvalued.

Return on Capital

Return on capital is the profitability ratio of the company. If the return on capital of a particular company is higher, it means that the company is growing and is successful. This ratio is calculated by dividing the EBIT (Earnings Before Interest Tax) by capital employed.

Objects of the Issue

Check where the money raised from investors will be utilised. Whether it will be used for any of the following:

  • Diversification of business

  • Acquisition

  • Open new branches

  • Fund subsidiaries

  • For general corporate purposes

Have Referral Code?

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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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IPO Investing Tips for a Beginner for Best Returns

Nutan Gupta

23 Feb 2017

Initial Public Offerings (IPOs) are quite popular in India and a lot of people try to make money by investing in IPOs. However, before making any investment in IPOs, one should go through this checklist and answer yourself all these questions:

Is this is an IPO or OFS?

IPO: In initial public offerings, the company decides the price band and the secondary market decides the true price after the stock is listed after analysing the company.

OFS: An offer for sale (OFS) is the way by which stakeholders of a company sell their holding. OFS enables promoters to dilute their holdings in listed companies in a transparent manner with a wider participation through exchange based bidding platform.

Background of the Promoter/Company

  • Check if there are any criminal proceedings against the company or its promoters

  • Check if the company has defaulted in the past

  • Check if there has been any legal complaint against the company or its promoters

Performance of the company in the past

  • Check how long the company has been into the business

  • Growth rate of the company over the years

  • Size of the company

Financial Health of the Company

  • Go through the changes made by the company in accounting policies

  • Be cautious of bloated profits

Financial Ratios

Earnings Per Share (EPS)

EPS is an indicator of the company’s profitability. EPS is calculated by dividing the net earnings by the number of shares in the issue. Investors also tend to calculate the future EPS in order to get an idea how much profit they will earn in the future.

Price to Earnings Ratio (P/E)

The P/E ratio indicates how the company is priced - whether it is cheap or expensive. It is calculated by dividing the share price of the company by it earnings per share. If the P/E ratio of a particular company is higher as compared to other companies in the same sector, it means that the shares are overvalued.

Return on Capital

Return on capital is the profitability ratio of the company. If the return on capital of a particular company is higher, it means that the company is growing and is successful. This ratio is calculated by dividing the EBIT (Earnings Before Interest Tax) by capital employed.

Objects of the Issue

Check where the money raised from investors will be utilised. Whether it will be used for any of the following:

  • Diversification of business

  • Acquisition

  • Open new branches

  • Fund subsidiaries

  • For general corporate purposes

Have Referral Code?