Dos and don’ts of investing in an IPO

One of the important things to keep in mind is that individuals should not invest using borrowed money and must not have unrealistic expectations of returns. (istock)

India’s capital markets are witnessing heightened activity over the last few months, and experts say that the trend is expected to continue, going ahead. While direct investing is highly risky and should only be done by learned investors, many retail investors look at initial public offerings (IPOs) to make quick returns on listing day.

Financial advisers suggest against investing in IPOs as the investment pie for retail investors is usually very small. Also, don’t be in a rush to invest in an IPO because as a retail investor, you can only invest a very small amount of money. If the company is decent, the IPO will get oversubscribed, and you will get no allotment or a small allotment, which may not be worth your time and effort.

We look at dos and don’ts for a retail IPO investor.

Don’ts

One of the important things to keep in mind is that individuals should not invest using borrowed money and must not have unrealistic expectations of returns.

Experts believe that the present exuberance may be getting over soon, at least in the near term, and the weak performance of the stock markets may hit the prospects of the upcoming IPOs.

Moreover, every investor should not invest in an IPO based on the advertisement, unsolicited advice, rumors or unauthentic news. They should also be wary of updates promising unrealistic gains and windfall profits in mass media.

One of the biggest mistakes an individual can is to invest in an IPO without reading the offer document. The offer document of an IPO lists out the facts, details and promises of the issuer company. It is very important for investors to read it before deciding on whether or not to invest in an issue.

Individuals should not indulge in impulse investing and retail investors must stay away from unauthorized and illegal trades outside the stock exchange mechanism prior to listing (grey market).

Dos

Individuals first need to take a holistic view of their financial goals and then invest accordingly as per the risk appetite. The gains in capital markets are never a straight line and are subject to ups and downs of the market.

Investors must also read the offer document before betting on an IPO. The key things to look in an offer document are: Risk factors, financials of the issuer, outstanding litigations and defaults, if any, business overview, the background of promoters and instructions before making an application.

Individuals should also go through the post-issue advertisements issued by the company for issue price and basis of allotment.

Do you have a personal finance query? Send in your queries at [email protected] and get them answered by industry experts.

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