There are a plethora of IPO and while they give good opportunities to make money they can also be dangerous if one doesn’t exercise caution in the choice of IPOs that one invests in.
While conventional wisdom has it that stocks should be bought into only with the intention of holding on to them for the long term and money can only be made if one waits on their investment for at least an year or so. While this is true and investors as far as possible should stick to this maxim IPOs are generally priced at a discount to their intrinsic value and can present opportunities of what is known as Listing Gains.
Here are a couple of tips that should hold you in good stead while investing in any IPO.
When you invest in an IPO you block a big amount of your cash for about a month or so. Invariably the number of shares that are allotted to you are not even half of what you have applied for. This is a very critical thing, because very often it can happen that if the shares are oversubscribed 6 or 7 times and you are investing only around Rs.25000 or Rs.30000 you might end up not even getting a single share. In such situations not only do you lose interest for that period but more important than that you lose opportunities to invest in other IPOs that might have been open in that period.
To avoid getting into such a situation if possible you should try to invest only on the last two days of an IPO. Along with that you should keep an eye on the “times” the issue has been oversubscribed. This can be easily seen by going to the NSE website. Through hit and trial you would get a fair idea of the amount of shares that you get depending on the money that you invest and the number of times the issue is oversubscribed. For instance most investors do get allotted some shares when they invest greater than Rs.40000 but in the case of Sasken IPO, which was oversubscribed 33 times even, those people who had invested more than 40000 did not end up with a single share.
While most IPOs do end up making you money one should exercise caution in which IPOs to invest. Generally it is a good idea to invest in the stocks of companies, which have been in existence for at least a decade or so. This would show that the promoters have a good understanding of the business and are not fly by night operators.
Another key is to look at the P/E multiple and not invest in the IPOs, which are exorbitantly priced at extremely high multiples. Normally a P/E, multiple which is greater than the medium term growth rate of the company, can be avoided. Many a times the promoters launch IPOs during boom times and then extract the maximum out of the IPOs because in all probability during good times the IPOs will get subscribed at most prices. However this does not bode well for the investors as they will be stuck with the shares at a really high price and the chance for appreciation is that much lesser.
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