A dummies guide to picking Initial public offers (IPOs)
An IPO offers a huge (possible) reward at the cost of a huge risk in investment. In such scenarios it is advisable to go through a systematic set of steps to understand better the odds of the IPO rewarding your investment. We describe a step by step approach to understanding IPO investment:
1. When are IPOs issued and what are they?
- IPOs are initial public offers which are made by companies which are planning to go public. The company is usually opting to go public (meaning selling their stock to the public), when the company is planning to cash in on a huge growth opportunity, and needs to raise capital to attain that growth.
2. How do people make money on the IPOs.
- Most IPOs allow the public (specially the retail investors) to subscribe their share at a discount in comparison with the general valuation. This offers an incentive for people to subscribe to the issue. When the issue is actually listed on the index, depending on the market sentiment, the stock may be priced higher than the issue price of the IPO, or lower. The investor makes money if it is higher.
3. Gauging and deciding IPO investment: All kinds of company metric like previous sales figures, PE, PEG, EPS, and other statistics. EPS is calculated on the price at which the IPO is issued and the number of stocks that are being offered as a part of the IPO. A comparison can be made to see if this is in line with that of the industry. Other qualitative indicators are the promoter standings. A good promoter will usually also indicate great business prospects for the company in the future.
1. When are IPOs issued and what are they?
- IPOs are initial public offers which are made by companies which are planning to go public. The company is usually opting to go public (meaning selling their stock to the public), when the company is planning to cash in on a huge growth opportunity, and needs to raise capital to attain that growth.
2. How do people make money on the IPOs.
- Most IPOs allow the public (specially the retail investors) to subscribe their share at a discount in comparison with the general valuation. This offers an incentive for people to subscribe to the issue. When the issue is actually listed on the index, depending on the market sentiment, the stock may be priced higher than the issue price of the IPO, or lower. The investor makes money if it is higher.
3. Gauging and deciding IPO investment: All kinds of company metric like previous sales figures, PE, PEG, EPS, and other statistics. EPS is calculated on the price at which the IPO is issued and the number of stocks that are being offered as a part of the IPO. A comparison can be made to see if this is in line with that of the industry. Other qualitative indicators are the promoter standings. A good promoter will usually also indicate great business prospects for the company in the future.
