An initial public offering (IPO) is the first time a company issues its shares to the public. A company that is otherwise privately-owned decides to go ‘public’ by offering its shares to the public to trade. Before an IPO is issued, the company has very few shareholders — this includes the company’s founders, angel investors, and venture capitalists. During an IPO, however, the company opens its shares for sale to the public. It is important to take a good look at a company before you invest. Prospective investors must look at the finances of a company, the quality, and stability of the management, and promoters, and their credibility.
IPOs are considered to be risky asset classes to invest in, particularly for retail investors. Unlike a company that is listed and has all its information disclosed to the public, often, not much is known about an unlisted company that is about to take the IPO route. So, retail investors must look into the existing institutional investors in the company apart from studying the entity’s and promoters’ track record.
What is a retail investor?
Retail investors are those who can apply for shares worth up to Rs. 2 lakh. Those investors who can apply for shares beyond the Rs 2-lakh limit are called non-institutional investors, which include high net worth individuals, companies, trusts, etc.
Retail investors, take note
Nowadays, investment banks compete for the IPO mandate and the company/promoter goes to whichever banker offers the highest valuations. This is something retail investors must take into consideration before investing, as this means there is not much left for the investor.
Retail investors must be wary of getting carried away by looking at the huge listing gains. They must remain cautious and evaluate each IPO on its own merit before investing their money.
For a retail investor, an IPO is an opportunity to pick stocks and invest at a low price in shares of the future industry. It provides valuable learnings in terms of stock appreciation. Retail investors can enjoy profits in the long term as dividends or bonuses are issued on the basis of the earnings of the company and the management.