• Before investing, analyse the IPO prospectus, financial health, and management team.
• Avoid relying solely on market hype and perform your own research.
• Compare the IPO’s valuation with industry peers. This will help you determine if the pricing is justified.
  IPOs generally perform better in bullish markets. So, assess the overall market environment before investing for better returns.
• Don’t chase “hot” IPOs based on popularity alone. Focus on long-term growth potential and company fundamentals.
• Use limit orders and trade during peak liquidity times to reduce the risk of slippage.

An IPO (Initial Public Offering) is launched when a company sells its shares to the public for the first time. By investing in IPOs, you can gain access to new sectors or industries that might not be available in the secondary market. This broadens your investments and makes your portfolio more balanced.

By learning how to choose the right IPO, you can benefit from the company's early growth. Also, you can avoid overpaying or experiencing losses due to overpriced shares. In this article, let’s study how to choose the right IPO in detail and see some key factors to consider before investing. Also, we will explore how to analyse an IPO prospectus and minimise slippage.

An IPO is a method through which a private company offers its shares to the public for the first time. It is an important corporate process in the life cycle of a company, whether it's new or already established. By issuing an IPO, a company can raise funds needed for:

• Expansion
• Research
• Paying off debts, or
• Other financial needs

When investors put their money in an IPO, they get a chance to buy shares early and benefit from the company's growth in the short or long term. Now, if we talk about the IPO process, it starts when the company announces the offering and sets a price range for its shares. Next, investors place bids to buy shares at the offered price. This IPO process is regulated by SEBI (Securities Exchange Board of India) to ensure it’s fair.

It is worth mentioning that shares in an IPO are sold in groups called "lots" rather than individually. Sometimes, the final price also differs from the initial offer based on demand. Additionally, not everyone will get shares if more investors want to buy shares than are available (oversubscription). Whereas, if fewer investors are interested (under-subscription), the company may not raise as much money as expected.

Investing in an IPO can be profitable. However, not all IPOs are good investments. Thus, as an investor, you must evaluate certain key factors like the company’s financial health, management, and market conditions. Let’s study them in detail:

Go through the prospectus

For those unaware, a prospectus is a document required by SEBI. It provides detailed information about the company’s financials, objectives, and risks. By analysing this document, you can understand the company's:

• Business model
• Growth potential, and
• Any significant risks

Financial health analysis

To review a company’s financial health and stability, you should look at key indicators like:

• Cash flow
• Debt-to-equity ratio
• Price-to-earnings ratio

It must be noted that a company with a strong financial track record has consistent revenue and low debt. This suggests the company is more likely to be a stable investment.

Purpose of IPO proceeds

Before investing in an IPO, always check for what purpose the company will utilise its IPO proceeds. If the proceeds are aimed at growth-related activities like research, technology, or market expansion, it indicates a strategic vision. However, if the funds are primarily for debt repayment, it might not be as promising an investment.

Public demand and market perception

Public interest in an IPO is a good indicator of its success. An “oversubscribed IPO”, where demand exceeds available shares, suggests strong investor confidence. On the other hand, “undersubscription” indicates a lack of enthusiasm. It signals the need for a more cautious approach.

Management and promoters

When deciding how to choose the right IPO, the experience and credibility of the management team and promoters are important. Strong leadership often correlates with better decision-making and strategic planning. Also, a company led by seasoned professionals is generally seen as a more reliable investment.

Valuation analysis

To make a thorough assessment, always compare the valuation of an IPO with other similar companies in the market. It will help you determine if the IPO is fairly priced. You can refer to metrics like:

• Price-to-Sales ratio
• Price-to-Earnings ratio

By using these ratios, you can easily identify whether the IPO is overvalued or offers good value compared to competitors.

Market conditions

One must be aware that in bullish markets, IPOs perform better as investor confidence is high. However, in bearish markets, even a strong IPO may struggle. Often, it leads to lower short-term gains. Therefore, before investing, always analyse the market conditions to invest in an IPO at the best times.

A prospectus is a legal document. It provides the following details:

• Company’s background
• Financial health
• Management
• Risks

For some investors, it is challenging to read a prospectus as they do not know what items to specifically look for. For your benefit, we highlight some factors you should focus on:

• Company description
  The first part of the IPO prospectus provides an overview of the company. It mentions the company’s history, products or services, and business strategies. This section helps you understand what the company does and how it plans to grow.
• Management team
  This section provides details about the company's “key executives” along with their experience and qualifications. It must be noted that understanding the management team is important. That’s because strong leadership often drives a company's success.
• Financials
  The financial section of the prospectus gives a detailed look at the company’s revenue, expenses, net income, and cash flow. This section is vital for assessing the company’s financial health and growth potential.
• Risk factors
  Every business faces risks. While issuing an IPO, companies are mandatorily required to outline these challenges. Usually, this section shows risks related to industry competition, regulatory changes, and economic factors. Understanding these risks is important when learning how to choose the right IPO. They help you gauge the company's vulnerability to market fluctuations.

While investing in IPOs, several investors make certain common mistakes that lead to financial losses. Let’s understand them and help you improve your chances of success with an IPO:

• Failing to conduct thorough research
  Many investors rely on media hype and word-of-mouth when investing in IPOs. They do not perform their own research. Be aware that, in most cases, this leads to poor decisions.
  Hence, while investing, always analyse the company’s financial statements, business model, and growth potential. Ideally, you should use the prospectus and independent reports instead of relying on hearsay.
• Overlooking the valuation
  IPOs are often priced at a premium due to their growth potential. However, many investors overlook whether the valuation is reasonable. To avoid overpaying, you should compare the company’s financial data with industry peers. This comparison will help you determine whether the price is justified based on its growth prospects.
• Chasing hot IPOs
  "Hot" IPOs is a popular share market term used for renowned companies with strong brand awareness. These companies attract a lot of attention and can be tempting. However, they are often “overvalued” due to high demand.
  Therefore, instead of investing based on popularity, focus on the company’s fundamentals and long-term growth potential. Avoid chasing IPOs just because they’re trending.
• Ignoring risk factors
  Every IPO comes with risks, which are often detailed in the prospectus. Many investors ignore these risks and focus only on expected rewards. Hence, it is important to carefully evaluate these risks and understand how they can impact the company’s future performance.
• Overestimating growth projections
  Companies often present optimistic growth projections to attract investors, but these can be unrealistic. Hence, investors should critically evaluate these projections. To do so, they can consider factors like market conditions and competition. This will help to determine if the growth targets are achievable.

When learning how to choose the right IPO, you can refer to the following expert tips for selecting a profitable IPO:

• Before investing, look for a company’s financial health, business model, and industry trends.
• Choose IPOs backed by reputable underwriters. That’s because they are more likely to carefully vet companies and ensure fair pricing.
• Examine the prospectus and understand the company’s objectives, risks, and financials.
• Investigate the promoters' track record and reputation. Assess their ability to steer the company toward success.
• Wait until after the lock-in period ends, as it may reduce volatility and provide a clearer picture of the stock’s performance.

For the uninitiated, slippage occurs when the price at which a trade is executed differs from the expected price. Usually, it happens during:

• High volatility
  or
• Low liquidity

It is significant to note that by minimising slippage, traders can protect their profits. Below are some key strategies to help you reduce slippage:

• Utilise limit orders
  Limit orders allow you to set a specific price at which you are willing to buy or sell a stock. This ensures that your trade is executed only at that price or better. In a way, it prevents unfavourable price changes.
  For example, say you set a limit order to buy a stock at Rs. 1,000. Now, the trade will only happen if the price is Rs. 1,000 or lower.
• Trade during peak liquidity times
  You can reduce slippage by trading when markets are most active, such as during the opening hours of the stock exchanges. High liquidity means more buyers and sellers. This makes it easier to execute trades at desired prices.
• Avoid trading during major news releases
  Usually, significant news events cause market volatility and lead to higher slippage. Hence, it is wise to wait until the market stabilises after such events before placing trades.
  For example, after a major policy announcement by the RBI, you can wait for the market to settle. This will help you avoid large price swings.
• Use 'slippage tolerance' settings on exchanges
  Some trading platforms allow you to set a maximum acceptable slippage percentage. This feature ensures that your trade will only be executed if the price difference is within your set tolerance. In this way, you are protected from unexpected price changes.
• Monitor the bid-ask spread
  The bid-ask spread indicates the difference between the buying and selling price of a stock. A wider spread often signals lower liquidity and higher slippage risk. By monitoring this spread, you can choose better times to enter or exit a position, especially in less liquid markets.
• Consider the 'Time in Force' for orders
  In the stock market, there are certain orders with specific time conditions, like 'Immediate or Cancel' (IOC) or 'Fill or Kill' (FOK). These orders ensure that your trade is executed quickly at an acceptable price. By using these orders, you can reduce slippage, as your trade won’t linger in the market where prices can change.

Related Articles:

• How to Apply for an IPO Online
• The Benefits of Investing in IPO in India
• What is IPO Subscription and What Does It Indicate
• What is the Difference Between Equity IPO vs Debt IPO