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IPO’s – Like Diabetes, applying for more doesn’t mean they are all good

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Have you heard your doctors say to avoid sweets to prevent Diabetes? Well, most of us have, considering India is the Diabetes Capital of the world. It is rightly called the sugar disease in most households.

Are you wondering what Diabetes has to do with Equity investments and wealth creation? Many believe there is no connection, but we have one for you.

The recent spate of IPO listings has been the talk of the town this year. Every month there are several companies going public. Over 36 companies have been listed in 2021 and raised over Rs.72, 000cr. This is more than double the amount raised in 2020.

Does it mean all those who applied to these IPOs made a profit? No, very few did.  

The more sugar you have, the higher your sugar levels, which can harm your health. In the same way, the more IPOs you invest in, the higher the chances of investing in poor-quality stocks. Again, such investments are bad for your financial health.

Can you avoid such financial pitfalls? Yes, you can.

Here’s what you can keep in mind before you invest

1) Make a research-based choice

When it’s raining IPOs, it pours. This phrase says it all. Companies with poor fundamentals demand high valuations when the markets are performing with IPOs shining through. As an investor, you must understand if,

  • the company is worth the valuation it demands
  • the company has strong fundamentals
  • you can make money at the IPO price.

Investing in any business because you like the brand is a recipe for disaster. Look carefully; you will see poor-quality companies’ post-listing gains cashing in on market sentiments. Sometimes such businesses trade above their IPO price initially but fall drastically when their business fundamentals deteriorate. Often, small investors don’t get a chance to book losses on time leading to capital loss. Study the business before you invest.

2) Choose the right IPO to invest

In a market that seems to be on a bull run, the valuations seem overextended as markets are inclined to discount the future. However, rightly estimating the future growth and profitability of a company cannot be ignored as it can help investors stay ahead of others. IPOs that offer the right price after considering future earnings help investors earn well. However, like any other business, you must have strong reasons to invest in an IPO.

3) Look beyond the IPO

Before a company goes public, investors have access to a fixed set of information. But, over time, after listing, the company shares information with investors periodically. As an investor, you must align your expectations accordingly.

Many often believe the IPO is the beginning of a company, however, that is seldom true. Look at One 97 Communications, the parent company of Paytm for instance. The company launched the largest ever issue in India, raising Rs. 18,300 crores. The issue price of the company was Rs. 2,150; however, it listed at a 9% discount i.e. Rs. 1,955 on the bourses.

Does this mean Paytm does not have a future?

Well, as we mentioned above, the price is not the only factor you consider when investing in an IPO or any company. The share prices of companies listing at a discount can grow in the future. We saw that happen with Macrotech Developers.

Though the company made a lackluster debut on the stock market, the share is trading over 150% today from its listing price. It is best that investors evaluate and choose investment in IPOs carefully and not apply to all of them blindly. Also, the investment in some of them, should be done with a long-term horizon and not merely for listing gains. Wise investors understand the value of being “patient” with companies that have long-term potential. Patience is key.

Whether you choose to invest in one IPO or several, ensure that your financial goals and expectations align. Don’t overextend yourself and invest in every new issue that comes your way. Make a concerted effort to study, understand and then act.

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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.

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