Are IPOs A Trap And What All To Take Care Of Before Investing In Them?

IPOs are the new talk of the town, apparently. Initial public offering (IPOs) is the process by which a privately owned company can list its shares in a stock market, making the shares available for the general public to purchase and earn profits.  The company can be new, young or old. It’s the company’s call […]

edtimes

September 26, 2021

Finance

5 min

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IPOs are the new talk of the town, apparently. Initial public offering (IPOs) is the process by which a privately owned company can list its shares in a stock market, making the shares available for the general public to purchase and earn profits. 

The company can be new, young or old. It’s the company’s call to be listed in the exchange and go public. This year, Indian companies have managed to raise more than Rs 42,000 crore through IPOs, in the first seven months alone—being the highest amount in the last decade. 

The highest amount in 2020

A total of 32 IPOs were launched in India. The IPOs stocks that were listed in 2020 are now trending above their issue prices. They have managed to gain as much as 400% since their listing. This has made IPO investing pretty exciting among investors who wish to enter the market. 

Upcoming IPOs

With Zomato, Barbeque Nation Ltd, Pesticides Ltd, HDFC, etc. already creating a buzz on social media, big names like Paytm, Bajaj Energy, Nykaa, and LIC are next in line to join the IPO festival. 

The Big Question Is, Are Ipos A Trap? 

IPOs are overhyped. No one actually has the time or inclination to read 400-500 pages of IPO offer documents. Something that they should really, really do. People just rely on news and influencers for knowledge on how to go about things. This hype is just created for the attention it gives the company by initial investors. 

Also Read: With New Unicorns And IPOs By Startups, Is India Actually Earning?

Ever Wondered Why Ipos Are Coming Now?

The Indian stock market has currently been in the bull run. The bull run is basically a period where shares on the stock market are on a rise. People are taking an interest in IPOs because the market is currently on a rise. 

The bull run

 

Even if a person wisely invests some of his income in shares of a good company there is a high rate of him earning a huge profit. The bull run creates a positive sentiment. But this is not always the case as stock markets are pretty unpredictable. 

With what speed the share prices rise can be the same speed at which it can decline too. The company is not accountable in any way to pay an individual back if he faces a loss while investing in an IPO. 

Be wise while looking for an IPO to invest in

Companies launch IPOs just because they want to raise money for expansions, research, and development, help their early investors to exit with a huge profit, but mainly to pay off debts. 

A few things to keep in mind before investing

The basic and most important thing one should do is understand what nature of business the company is in. Check up on the company’s background, financial history, past performance to understand its growth potential. 

The research will shed some light on why the company is coming out with an IPO and where the money will be used (pay loans or expansion). Stay away from IPOs where the business activities are unclear. 

Read the company’s prospectus (kind of a booklet) that contains all the details of the company very carefully. Before investing, make sure to be objective, check the trends of the stock market. If there is a downtrend, it’s better not to invest as it will affect the IPO negatively.

Don’t get carried away with the hype. It’s always better to make a decision depending on how much risk one can take and how good the fundamentals of the business are with respect to its valuation. 

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