Tips to identify a good IPO

Identifying a good IPO is so difficult, but certainly not impossible. A good IPO investment has certain traits. If you can get most of it right in the IPO you are planning to invest, then your chance of getting lucky is more.

So, here are some IPO tips you can follow:

Tip 1: How to select an IPO?

If you are thinking to do a detailed research and to read every detail in the prospectus, to browse through the articles from the third party websites, or from the investment banks – then STOP right now!

To do a research yourself, you may not have the way in to all the organizational information which would help you decide. The 3rd party websites may have been compromised to give biased views and the investment banks and brokers will have their own vested interests to portray the company they support in a good light. So, the rule is, if the QIB category is over subscribed, then you can trust that IPO, because the Institutions have better access to the Company data than the retail individual investor. And you can be sure that the institutions will not put in their money where it won’t grow.

Tip 2: You should know how they will utilize your money?

Read the prospectus in which they will state on how they will make use of such a huge capital they raise by going public. The plan of action which may include coming up with new products, spreading their wings to a different sector, bettering their infrastructure, or just clearing off the debts, any of these or a combination should have a potential to generate good revenue. If the prospects look promising, the chance of buying looks bright.

Tip 3: Invest at cut-off price

If you are a retail individual investor and you are keen on increasing the chance of getting shares allotted then bid at the cut-off price. That way your application will be considered, whatever maybe the final allotment price.

Tip 4: Evaluate the company’s prospects

The timing of the company’s entrance into the market, and the success of the competitors in the same sector and their drive to make the most out of the market share should be evaluated before you invest in an IPO. The company’s history as a private business, their growth path and the fundamentals they believe in.. every matter has to be considered when you start considering to put money in an IPO

Tip 5: Fill out the form with every detail

When you are filling out an application form, fill in every detail they have asked for. Incomplete forms may get rejected. And if you miss out filling out an ECS refund, you may be cut out from the facility of easily getting the refund into your bank account.

Tip 6: Select a good broker

The most-sought after IPOs are quite hard to get. There are brokers or  IPO portals that can open the door to new and interesting IPO stocks. They may have enough connections to ensure decent allocation for you.

Tip 7: Look at the valuation

Valuation is  toughest to conclude for retail investors. This process is extremely technical. The investment bankers and under-writers judge the quality of management and returns before arriving at the final offer price. Compare the valuation of the IPO in India in the secondary market with a listed peer.

Tip 8: On what basis should we judge an IPO?

If the IPO is of the new private company, then judge it using formulas like price to earnings ratio, price to book ratio and return on equity.