Home IPO ipo investing: 5 IPO mistakes retail investors should avoid making

ipo investing: 5 IPO mistakes retail investors should avoid making

by Chris Williams
There has been a gold rush in the Indian IPO market in recent times. In 2021, close to Rs 1.2 lakh crore of capital was raised by companies via the IPO route.

It is significantly higher than the total capital raised between 2018- 2020, which amounted to slightly over Rs 73,000 crore. Tech startups, e-commerce companies, SMEs, etc. have been pioneering the space.

The bullish IPO market also renewed investor interest in the market.

Alongside experienced investors, first-time buyers are also venturing into the space in large numbers. The growing digitization and transforming fintech space have also accelerated the growth saga.

Meanwhile, it is important to have sound knowledge about the market. Just like any financial instrument, making sustainable returns from IPO requires scrutinizing the market conditions and making informed decisions.

Mentioned below are some of the tips that can help an investor maximize returns without compromising the safety of their investments.

1. Do not Rush, do the basic research right
As a foundational step to identifying a good IPO, it is essential to conduct in-depth research on the company. The scope of research should include but not be limited to the past track record, financial health, industry analysis, competitive intelligence, etc.

Discerning investors should also look into the future of the company and its growth roadmap.

2. Do not invest without knowing the business model
You should not invest in a company without knowing the business model at hand. Both established as well as a new venture requires a robust business model to operate.

A business model of a company encompasses knowledge about the products (and services), the target audience, and the future prospect.

Having an idea about the business model can help the investor to evaluate whether the business can make a profit or not in the foreseeable future.

3. Do not overlook the valuation of IPO
The valuation of an IPO is the most critical quantitative parameter. It is assessed with the help of discounted cash flow, share market trends, past financials, performance with respect to peers in the same industry, etc.

The higher the valuation of an IPO, the bigger the demand. Meanwhile, retail investors should also keep in mind that the valuation of IPO can’t be the only criteria. There have been numerous cases in the past, wherein despite high valuations in the beginning the values have tanked thereafter.

4. Don’t play out loud in a declining market
As a rule, one should avoid investing in a declining market. If the market is bearish and analysts & other industry experts believe that the decline will continue, one should avoid investing in an IPO. Chances are high that the IPO would not give great returns in the near future.

5. Don’t rush to sell on listing day
Generally, it is a thumb rule to sell on the listing day of the IPO, as it can give great returns. However, it has been noted that due to the rush on a listing day, prices get corrected. Hence, it is advised to wait for a day or two rather than sell on the listing day itself.

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