Investing in IPOs: 5 IPO Mistakes Retail Investors Should Avoid Making

There has been a gold rush in the Indian IPO market of late. In 2021, the companies raised close to Rs 1.2 lakh crore of capital through the IPO route.

It is significantly higher than the total capital raised between 2018 and 2020, which amounted to just over Rs 73,000 crore. Tech startups, e-commerce companies, SMEs, etc. have been pioneers in the space.

The IPO bull market also renewed investor interest in the market.

Along with seasoned investors, first-time buyers are also venturing into the space in large numbers. The increasing digitization and transformation of the fintech space have also accelerated the growth saga.

In the meantime, it is important to have a solid understanding of the market. Like any financial instrument, achieving sustainable returns from an IPO requires analyzing market conditions and making informed decisions.

Mentioned below are some of the tips that can help an investor maximize returns without compromising the safety of their investments.

1. Don’t rush, get basic research right
As a fundamental step in identifying a good IPO, it is essential to conduct in-depth research on the company. The scope of the investigation should include, but is not limited to, past history, financial health, industry analysis, competitive intelligence, etc.

Discerning investors should also look to the future of the company and its growth roadmap.

2. Do not invest without knowing the business model
You should not invest in a company without knowing the business model in question. Both established and new businesses require a solid business model to operate.

A business model of a company encompasses the knowledge about the products (and services), the target audience and the future perspective.

Having an idea about the business model can help the investor assess whether or not the business can make a profit in the foreseeable future.

3. Don’t overlook the IPO valuation
The valuation of an initial public offering is the most critical quantitative parameter. It is evaluated with the help of discounted cash flow, stock market trends, past financials, performance relative to peers in the same industry, etc.

The higher the valuation of an IPO, the higher the demand. Meanwhile, retail investors should also keep in mind that the valuation of the initial public offering cannot be the only criteria. There have been numerous cases in the past, where despite high valuations at the outset, stocks have plunged thereafter.

4. Don’t play loud in a declining market
As a general rule, investing in a declining market should be avoided. If the market is bearish and analysts and other industry insiders believe the decline will continue, investing in an IPO should be avoided. There is a good chance that the IPO will not be very profitable in the near future.

5. Don’t rush to sell on listing day
In general, it is a rule of thumb to sell on the listing day of the initial public offering, as it can lead to huge profits. However, it has been observed that due to the rush on a trading day, prices are corrected. Therefore, it is recommended to wait one or two days instead of selling on the same trading day.

(The author is Vice Chairman of GCL Securities Limited)

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