Potential Investors and their Objectives:
IPO’s on one hand are good means by which a firm raises funds but on the other hand they are not always regarded to be the best way of investing for the investors. Prior to investing, it is imperative for investor to consider risks that have to be taken and returns expected. One must be clear about the benefits he hopes to derive from the investment. The investment objective should be clear: whether it is long term capital growth or short term capital gains. The probable investors and their goals can be classified as follows:
1. INCOME INVESTOR
An ‘income investor’ is the one who seeks for progressively rising profits which shall be given out to the shareholders on a regular basis. For this, he needs to analyze the firm’s potential for profits and its dividend policy.
2. GROWTH INVESTOR
A ‘growth investor’ is the one who strives for potential steady increase in profits which are reinvested for further expansion. For this he must carefully examine the firm’s growth plan, earnings and potential for retained earnings.
A ‘speculator’ works towards short-term capital gains. For this he should search for potential of an early market breakthrough or discovery which shall raise the price instantly with little care about a quick decline.
It is necessary to correctly scrutinise the IPO the in which investor is planning to invest. He must carry out a systematic research at his end and attempt to find if the goals of the firm match his own personal objectives or not. The unpredictable nature of IPO’s and volatility of the stock market adds to a large extent to the risk factor. So, it is advisable that the investor must do his homework before considering investing.
The investor should know about the following:
I. BUSINESS OPERATIONS:
- What are the goals of the firm?
- What are company’s management policies?
- What is the potential for growth?
- What is the turnover of the labor force?
- Will the business have long-term stability?
II. FINANCIAL OPERATIONS :
- What is the firm’s credit record?
- What is the company’s liquidity position?
- Are there any defaults on debts?
- Firm’s expenditure in comparison to competitors.
- Firm’s capability to pay-off its debts.
- What are the projected earnings of the concern?
III. MARKETING OPERATIONS :
- Who are the potential investors?
- What are the chances of success of the IPO?
- What is the influence of the IPO on other investors?
- What are the various products and services offered by firm?
- Who are the strongest competitors of the firm?
IPO INVESTMENT STRATEGIES
Investing in IPOs is considerably unalike to investing in seasoned stocks as there is limited information and research on IPOs, prior to the offering. And soon post-offering, research opinions originating from the underwriters are invariably positive. These are few strategies which could be considered before investing in the IPO:
a) UNDERSTAND THE WORKING OF IPO:
The first and foremost step is to understand the functioning of an IPO and the basics of an investment process. Other investment options can also be taken into consideration based on the objective of the investor.
b) GATHER KNOWLEDGE:
It would be beneficial to gather as much knowledge as possible about the IPO market, the company offering it, the demand for it and any offer being planned by a competitor.
c) INVESTIGATE BEFORE INVESTING:
The prospectus of the company can serve as a good option for finding all the details of the company. It gives out the objectives and principles of the management and will also cover the risks.
d) KNOW YOUR BROKER:
This is a crucial step as the broker would be the one who would majorly handle your money. IPO allocations are controlled by underwriters. The first step to getting IPO allocations is getting a broker who underwrites a lot of deals.
e) MEASURE THE RISK INVOLVED:
IPO investments have a high degree of risk involved. It is therefore, essential to measure the risks and take the decision accordingly.
f) INVEST AT YOUR OWN RISK:
Finally, after the homework is done, the big step needs to be taken. All that can be suggested is to ‘invest at your own risk’. Do not take a risk greater than your capacity.