Initial Public Offers (IPO) are like cash cows for investors. While they pose a certain risk, the listing gains present an attractive opportunity to book quick short-term gains. 2022 is also about some major BSE and NSE IPOs. If you plan strategically, there are good chances of getting booking listing gains and making quick profits. So, what should be your IPO buying strategy for the remainder of 2022? Let’s find out!
IPO investment strategy for 2022
Time for IPO watch! If you are planning to invest in an IPO, then you should keep in mind the following points before investing:
- Research properly: Before investing in any company, it is essential to research properly about the company, its industry and the founders of the company. Further, whether the company is currently profitable or not also plays an important role. This is especially important in the case of startups that are into losses and going for IPOs.
- Check the valuation: Valuation of the shares of the company is essential. If you feel that the price is overly valued, then the IPO might debut at a discount. Thus, it will lead to listing losses rather than listing gains. Listen to what the experts say about valuation and do your research to determine the company’s true valuation. If the shares are being issued at an undervalued price, then it’s a green signal as the share price will increase in the future. Therefore, valuation plays a significant role when investing in an IPO.
- Check the over-subscription or under-subscription rate: IPOs are usually open for investment for 3 working days. Therefore, if you are unsure whether to invest, you can wait for a day or two to check the IPO subscription status of different categories of investors. This will allow you to know how much the IPO is subscribed to and whether there is an oversubscription or under subscription.Investments in IPO are usually made by retail investors, non-institutional investors, qualified institutional buyers, employees etc. You can get to know the subscription rate for each of the categories from the stock broking platform or other news mediums. This will give you an idea of whether the IPO is worth investing in.
- Know the objectives of raising an IPO: What is the purpose for which the company is issuing an IPO? This is important because you need to know where the company will use your funds. If you find that the funds raised through IPO will be utilized for purposes that won’t bring much growth to the company, you can avoid investing.
- Go through the red herring prospectus: Companies going for IPOs are mandated by the SEBI to issue the draft red herring prospectus. It contains detailed information about the company, including its financial data, the sectors in which it operates, its management, and its plans.
- Invest at the cut-off price: You can bid for an IPO at any price within the price band. However, bidding at the cut-off price increases the chances of getting an allotment. For instance, if the price band for a BSE or NSE IPO is Rs. 100-120, you can bid for the IPO at any price between Rs. 100 and Rs. 120. However, it is always better to go for the cut-off price.
- Plan your exit: While you have invested in the IPO, it is also essential to plan your exit strategy. While trading in shares, it is crucial to time the market, i.e., when to enter and exit. Ask yourself, what if the IPO debuts at a premium? What if it opens at a discount? Whether I have invested for the long term or just for listing gains? Should I hold the shares if the IPO opens at a premium or discount? These questions will help you plan an exit strategy.
- Know the lock-in period: Existing company investors (before IPO) agree to a certain lock-in period during which they cannot sell their shares. You need to research the company’s key investors and if any lock-in period applies to them. When will this lock-in period expire? These investors invest a huge amount in the company; therefore, once they go on a selling spree, it will lead to a price drop. Therefore, it is essential to determine the lock-in period of these investors and, if possible, when they are planning to exit the company.
- Understand the risk factors: Understand the risks of investing in the IPO and the company you are investing in. The primary risk of investing in the IPO is that it may open at a discount, lowering your investment value. The second risk is if you do not exit at the right time, then your gains may diminish, or your losses may increase. As discussed earlier, you must plan your holding period and exit strategy.
Each IPO presents a new opportunity to book quick profits. However, IPO investments do involve a certain amount of homework on your part. You must do your research thoroughly before investing in IPOs because while you can book gains, there are probabilities of losses as well. However, if you keep the above points in mind and act smartly, the chances of booking profits increase. 2022 is set to bring more IPOs for you.
Doing a little research can give you a rough idea of when these BSE or NSE IPOs will be open for investments. Instead of waiting for the IPO to open, adopt a proactive approach by planning your investments and doing your research now. When the IPO opens, all you have to do is apply, keep IPO watch and check your IPO subscription status. Close the year 2022 with some good gains from your investments!
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