The listing of a private company on the stock exchange is known as Initial Public Offering (IPO). It is at this point that investors are invited to bid for buying the shares of the company that was held privately thus far. Based on the past performance of the company, the offer price range is determined and once all bids are received, generally shares are allocated on a pro-rata basis.
The crazy chase to invest in IPO
IPO investments attract a lot of investors as it has the potential to give very high returns. It is believed that the investment made at the time of IPO give high returns at the time of listing. However, as with other types of equities, there is a high risk involved when you invest in an IPO.
The funds raised through an IPO are used for several purposes by the company. These include clearing off debts, expanding and improving their operations, or using it to meetworking capital needs.
Before you choose to invest in IPOs, you must remember that all IPOs are not open to general public. The underwriters choose the category of people for which the IPO is opened.
If you opt to invest in IPOs, you must be aware of the risks associated with these financial products. Here are four things you should keep in mind while investing in an IPO.
1. All offerings are not suitable for all kinds of investors. Consider your financial situation and goals before making a decision.
2. Read the draft red herring prospectus. This will help you understand how the funds will be utilized. The prospectus also provides information about the objectives and fundamentals of the company and its future growth prospects.
3. You must rely on facts and not fall prey to marketing strategies used by agencies to entice investors.
4. Analyze the promoters and their backgrounds. IPOs that have reputed institutions and government backing are safer.
Investing in an IPO must be a well-thought decision. It is important to ensure the risk level suits your personal financial situation and appetite. With IPO investments, you may make money or lose your capital; therefore, be cautious before you apply for one.
Investing in IPO through mutual funds
As mentioned before, if an IPO has institutional or government investments, the risks are significantly reduced. Until recently, mutual funds did not invest in IPOs because of the high risks. However, that is no longer the case. Mutual funds have recently begun investing in quality IPOs issued by small and medium enterprises (SMEs).
Here are three benefits of investing in IPOs through mutual funds.
1. Investing in mutual funds online for retail investors is easily available and provides greater flexibility. You are able to gain exposure to the stock market at an affordable entry price.
2. The schemes are managed by experienced professionals who analyze and study the IPOs and the overall market. This reduces your risks because the fund managers and their research teams do the homework for you. Moreover, you are able to diversify your portfolio further reducing your risks.
3. IPO allotment often happens on a pro-rata basis. Therefore, you may be allotted less than the applied number of shares. However, institutions have a preferential allotment, which is beneficial.
Tags: Cash Flows, financial planning, Funding, investments, IPO, money, Mutual Funds, personal finance
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