Investing in an upcoming IPO? Consider these factors before investing

Usually, when a company comes out with an initial public offering (IPO), there is a lot of noise around it. Nobody wants to miss an opportunity of investing in an IPO. However, not all IPOs provide desired returns. Some IPOs fail miserably and people face losses.

Here are some factors one should consider before investing in an IPO.

Check company background

Before investing in an IPO, always read as much as possible about the business of the company and its operations. Evaluate how the company has performed financially over the past few years. It is very important for a company to be financially sound.

Future prospects of the company

Understand why the company is coming out with an IPO. Talk to the management and understand the future plans of the company. Evaluate how the money collected from the public will be utilised in future - whether the company will use it for expansion, to pay off loans or for anything else.

Look at the Valuation

Valuation is one of the most important factors that one should consider while investing in an IPO. The best way to evaluate the valuation of any company is to compare its price with that of its peers in the listed space. If the business of the company is new, and it has no peers in the listed space, you can simply judge its valuation by using the price to earnings ratio and return on equity. The price to earnings ratio is calculated by dividing the share price of the current stock by the earnings per share.

Stay cautious of over-subscription

The number of shares that a company offers during an IPO are limited. Moreover, the allocation of shares to each category of investors, including the retail investors is pre-decided. A lot of times, the number of applications made is higher than the number of shares which are on offer. So, the allotment is done proportionately and there are chances that you may get fewer shares than you applied for.

Always read the prospectus

The fine print contains all the details related to the company - business of the company, summary of the financial statements, capital structure, objects of the issue, management views etc. The prospectus gives an overall information about the IPO and hence it is easy to decide if the company is worth investing or not.