Investing in an upcoming IPO? Consider these factors before investing

Nutan Gupta

17 Feb 2017

Usually, when a company comes out with an initial public offering (IPO), there is a lot of noise around it. Nobody wants to miss an opportunity of investing in an IPO. However, not all IPOs provide desired returns. Some IPOs fail miserably and people face losses.

Here are some factors one should consider before investing in an IPO.

Check company background

Before investing in an IPO, always read as much as possible about the business of the company and its operations. Evaluate how the company has performed financially over the past few years. It is very important for a company to be financially sound.

Future prospects of the company

Understand why the company is coming out with an IPO. Talk to the management and understand the future plans of the company. Evaluate how the money collected from the public will be utilised in future - whether the company will use it for expansion, to pay off loans or for anything else.

Look at the Valuation

Valuation is one of the most important factors that one should consider while investing in an IPO. The best way to evaluate the valuation of any company is to compare its price with that of its peers in the listed space. If the business of the company is new, and it has no peers in the listed space, you can simply judge its valuation by using the price to earnings ratio and return on equity. The price to earnings ratio is calculated by dividing the share price of the current stock by the earnings per share.

Stay cautious of over-subscription

The number of shares that a company offers during an IPO are limited. Moreover, the allocation of shares to each category of investors, including the retail investors is pre-decided. A lot of times, the number of applications made is higher than the number of shares which are on offer. So, the allotment is done proportionately and there are chances that you may get fewer shares than you applied for.

Always read the prospectus

The fine print contains all the details related to the company - business of the company, summary of the financial statements, capital structure, objects of the issue, management views etc. The prospectus gives an overall information about the IPO and hence it is easy to decide if the company is worth investing or not.


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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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Investing in an upcoming IPO? Consider these factors before investing

Nutan Gupta

17 Feb 2017

Usually, when a company comes out with an initial public offering (IPO), there is a lot of noise around it. Nobody wants to miss an opportunity of investing in an IPO. However, not all IPOs provide desired returns. Some IPOs fail miserably and people face losses.

Here are some factors one should consider before investing in an IPO.

Check company background

Before investing in an IPO, always read as much as possible about the business of the company and its operations. Evaluate how the company has performed financially over the past few years. It is very important for a company to be financially sound.

Future prospects of the company

Understand why the company is coming out with an IPO. Talk to the management and understand the future plans of the company. Evaluate how the money collected from the public will be utilised in future - whether the company will use it for expansion, to pay off loans or for anything else.

Look at the Valuation

Valuation is one of the most important factors that one should consider while investing in an IPO. The best way to evaluate the valuation of any company is to compare its price with that of its peers in the listed space. If the business of the company is new, and it has no peers in the listed space, you can simply judge its valuation by using the price to earnings ratio and return on equity. The price to earnings ratio is calculated by dividing the share price of the current stock by the earnings per share.

Stay cautious of over-subscription

The number of shares that a company offers during an IPO are limited. Moreover, the allocation of shares to each category of investors, including the retail investors is pre-decided. A lot of times, the number of applications made is higher than the number of shares which are on offer. So, the allotment is done proportionately and there are chances that you may get fewer shares than you applied for.

Always read the prospectus

The fine print contains all the details related to the company - business of the company, summary of the financial statements, capital structure, objects of the issue, management views etc. The prospectus gives an overall information about the IPO and hence it is easy to decide if the company is worth investing or not.