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How to Evaluate IPO Stocks: A Guide for Beginner Investors
Financial investments are a great way to earn money, but when conducted crucially and critically. Investing in IPO Stocks is no exception. You can incur losses if unversed and invest lackadaisically in random stocks.
Hence, evaluating the share market IPO stock is imperative, especially for newbies and seasoned pros. Factors like balance sheet, financial performance for at least the last three FYs, sales, net asset value, profit before and after tax, etc., help you assess the market condition of the stock.
Before divulging such details, it is paramount for beginners to comprehend the concept of IPO, why companies prefer listing their brands in the share market, how SEBI determines their valuation, etc. Read this article to learn valuable insights on IPO stocks.
What Are IPO Stocks?
The Initial Public Offering, commonly abbreviated as IPO, is a private company offering a percentage of its stocks to the common public or investor instead of funds. A company publicises itself by offering equities to investors to maximise its annual revenue.
One of the most profitable examples is Facebook. Mark Zuckerberg sold around 30 million shares for US$1.1 billion. Recently, CNBC reported that as share prices have skyrocketed, Facebook has seen a US$28 billion windfall.
However, you may wonder why companies offer their shares to investors. Brands undertaking new ventures like expansion and other additions that require a certain amount of funds opt for listing in the share market. In simpler words, they collect a certain percentage of the revenue needed from market investors.
Factors Investors Consider While Evaluating IPO Stocks
Several people believe that investing in IPOs will help them garner maximum profit. However, that might only sometimes be the case. Hence, critical and careful evaluation is paramount before you invest your hard-earned funds in an IPO. Check out the eight facets you must acknowledge.
1. Market Condition
First and foremost, you must assess how the overall stock industry is performing. For instance, all pharmaceutical companies flourished during the pandemic, and the companies manufactured sanitisers and surface cleaners like Dettol, Lifebuoy, etc. In such a situation, investing in a similar IPO stock will likely gain momentum, ensuring your profit.
2. Stocks Performance
Secondly, you must consider the previous performance of the stocks. Study how the company endured or swerved during external influences like industry trends, economic conditions, geopolitical events, etc. For better monitoring and study, you can use the IPO dashboard to help you make more accurate decisions.
3. Experts View
Always adhere to what the experts are sharing about an IPO stock. They are professionals who have studied and researched before imparting their advice. For instance, experts suggest investing in low-cost index funds and allocating around 10% to more speculative investments like IPOs. Always make your decisions based on their suggestions. They might not be perfect, but closer to accuracy.
4. Growth Prospects
Consider if the stock has the potential to develop over time. Look through their expansion plans, the individualism of their products and services, etc., to draw a rough draft of their growth graph. This will enable more improved decisions.
5. DRHP Evaluation
To gain a detailed understanding, refer to the Draft Red Herring Prospectus. This document comprises the company’s operations, financial risk, potential growing areas, etc. Hence, it will aid you in understanding how it may perform in the future.
6. Dividend Policy
The company’s dividend policy is another factor to consider. Opt for stocks offering a stable dividend policy irrespective of the company’s financial health. A healthy and stable policy will always range below or up to 50%. You must reconsider stock offerings more than that since the percentage may fluctuate based on market volatility.
7. Tracking Over-Subscription
If the market demand exceeds the share count, it is called over-subscription. Investors usually categorise this occurrence under market trends since this means there is a surge in demand for the stock. However, you must be careful, as this can indicate post-listing volatility.
8. Financial Valuation Ratios
Figures reveal the ultimate truth of a company. Ensure profound information on price to earning, price to book, and price to sales ratio before investing your funds. Compare these ratios for enhanced knowledge of the company’s financial health and relative value.
Conclusion
You should always research extensively before investing your hard-earned money in an IPO stock. The above factors will help you improve your evaluation. However, you can choose Motilal Oswal’s Research 360 to catch hold of the latest trends, expert insights and much more for an enhanced trading experience.
Kenneth is a proud native of sydney, born and raised there. However, he pursued his education abroad and studied in Australia. Kenneth has worked as a journalist for almost a decade, making valuable contributions to prominent publications such as Yahoo News and The Verge. Currently, he serves as a journalist for The Hear Up, where he focuses on covering climate and science news. You can reach Kenneth at [email protected].
