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It’s not enough to decide that you have to invest in equity offers; the important thing is to get the complete information regarding investments. One should read full copy of the prospectus, which if not provided you can make a complaint to Sebi. Listed down are some of the important criteria’s you should keep in mind while investing in IPOs.
Issues to concentrate on:
Check if it’s an IPO or FPO: In IPOs, the price is decided by the company and the true price is discovered from the market where as in FPOs, the market has nothing to analyze as the price is already discovered.
Check if it’s fixed-price or book-building issue: In fixed-price issue, there are no reservations for FIIs/HNIs and 50% for small investors which is 35% in case of book-building issue.
Check these issues regarding the promoter: Go for an IPO with a very good promoter background. Look for its experience and also check if there is any criminal proceeding against it.
Check these issues regarding the company: See if it’s the main company or the holding company. Also the performance i.e. the no. of years in business, size, and growth rate and market share is to be kept a watch on.
Check if the financials are reliable.
Check in balance sheets for: fixed assets, investments and loans and investments.
Financial parameters to concentrate on:
Earnings Per Share (EPS): Company’s profit is directly proportional to EPS.
Price Earnings Ratio (P/E): Rate of a company’s earnings is directly proportional to P/E. A company can be compared with another based on this ratio.
PEG ratio: Value of a growing company’s shares is inversely proportional to its PEG ratio.
Return on capital: High returns mean successful company.
Promoter’s attitude towards share-holders rewards: Dividend policies, bonus issues, rights issues, de-listing of group issues, past public issue pricing.
Board of Directors: Are they family-controlled or independent members. What is their experience?
Services of the company: Check the economy if it’s old or new. Is it cyclical? What’s the market outlook? Etc.
Customers: Is there a dependency on few no. of customers?
Issue size: Allotment and hence liquidity is better for large issues.
Public float: Liquidity ultimately depends on it.
Justification of the price: P/E should be calculated on recent period EPS which can be checked in the “Justification of issue price”. Also be aware that every company is unique, no two are similar.
Objects of the Issue: Finance new projects; undertake an existing one for expansion, refund debts, open new branches, etc.
Risks: Internal factors like family disputes and external like usage of stock exchange etc are to be identified.
Pending Government approvals: Check for no such situation by any of the govt depts. such as SEBI, RBI or PCB.
Trademark/brand/copyright: Check for no such issues.
Company listing: BSE/NSE.
Complaints: Their number, type and age are looked for.
Also look for: News from business channels, papers and media.
In case you want to sell the allotments, do so if there is profit. If you are confident about the company then just because of the decrease in its market price, don’t sell it off. And in case you want to become a part of the company, stick to it.
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