It's that time of the year when we make resolutions and strictly abide by them. After all, these resolutions are in our best interests.
One of our key takeaways from 2020 is to maintain good financial fitness. It enables us to overcome the rainy days, allowing us to make the most of any market opportunity. For instance, the benchmark indices have grown more than 80 percent after they bottomed out last year in March. Several stocks grew multifold with some even growing as much as 70x and beyond. But how should you go forward? What should be your strategy?
A great way to enter into 2021 is with Initial Public Offerings (IPOs). So, let's have a look at what is an IPO and how you should go about it.
What is an IPO?
An Initial Public Offering, popularly known as an IPO, takes place when a company needs to raise money. It releases some of its shares for "public" investments which are purchased at an "issue price". This fundraising could be for anything—from business expansion to other strategic initiatives. The company shares all these details in its Draft Red Herring Prospectus (DRHP), an initial registration document submitted to the market regulator the Securities and Exchange Board of India.
The DRHP carries everything, from the company's financial standing and business prospects to its liabilities and why it wants to raise the money. Any interested investor can go through it and choose to participate in an IPO accordingly.
Are IPOs profitable?
IPOs are looked upon by investors with two investment horizons—with a short-term and long-term perspective. Though there are incentives in the short term, any new investor should focus on the bigger picture with a long-term outlook. But how good are IPOs? Data speaks volumes in this regard.
In the past three months, a total of nine IPOs were launched in India. Some of the recent ones include Antony Waste Handling Cell, Mrs Bectors Food Specialities, Burger King India, and Gland Pharma alongside others.
November's Gland Pharma (issue price Rs 1,500) is trading at more than Rs 2,400 while December's Burger King (issue price Rs 60) is trading at over Rs 170. Mrs Bectors Food Specialities (issue price Rs 288) is at more than Rs 500.
You should not just go ahead and put your money in an IPO without doing a proper analysis. It is because there is a flip side to it as well. For instance, Net Pix Shorts Digital Media (issue price Rs 30) has effectively delivered zero returns to its investors and is trading at around Rs 30. Similarly, October's Bodhi Tree Multimedia (issue price Rs 95) has corrected to Rs 77.50 after peaking at Rs 96.
What should you do then?
If you are completely new to the stock market, just make sure that you read up as much as possible on upcoming IPOs. Learn to study DRHP. You must completely understand the business model of a company that you're planning to invest in. DRHP should be your bible.
Take the help of cutting-edge brokers as they issue IPO-centric advisories with their data-driven methodologies. It will offer you greater clarity with relevant metrics. You must check the subscription rate on the second day of an IPO. If the subscription is good, it is likely to deliver great returns. A good subscription means that the IPO has either been oversubscribed or is on the verge of getting oversubscribed.
This practice will help you graduate to the equity market with a strong understanding of fundamentals. The price action (the way the stock price treads) of an IPO is relatively easy to understand than listed stocks. You will be able to identify what factors work in a company's favour and differentiate between true value and speculation. The best part is that you will be making sturdy returns while learning to trade.
Remember, stock markets around the world have only grown and breached previous all-time highs even after the most rigorous financial overhauls. It is only logical to join them now and making IPO investments a part of your New Year resolution. The sooner, the better!
(Amarjeet Maurya is the AVP – Mid Caps at Angel Broking Ltd.)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.