IPO stands for Initial Public Offer. Any company that wants to enter into the market can do so through an IPO. There are always new companies that keep showing up on the horizon through such IPOs. Also, given that in any stock markets IPOs are potentially the investment avenues that can give you huge returns in relatively less time, they are always an attractive proposition. But before you start jumping on to every IPO and burning your fingers, you must focus on items to consider when investing in an IPO
What are IPOs?
Any company that is growing requires capital for expansion. It can get this either by raising debts and bonds or through IPO. In case of debt tools, the company ownership is not affected, it is quite similar to the loan we take for various needs. On the other hand, with an IPO company will share the ownership and hence the profits and losses. Hence, when you invest in an IPO you are going to share the ownership of the company in a sense. So you need to be careful in picking your target company.
Important factors on Company Performance
The first point that you must check is the company assets to debt ratio. Logically, it should be positive. You can get this information in its financial reports. If the difference between the assets value and the debt is positive and more than its share value, you are bound to make decent profits and it is a good share to invest in.
Second thing to focus on is the annual profits of the company. Certain companies probably are in an early stage and do not have a big assets to debt difference to boast of, however they have a very strong annual growth rate. This in a sense means that with time it would make bigger profits. This again is a good item to consider.
Another consideration could be the legal issues and other problems the company is currently facing. In most cases, it is difficult to judge how the legal problems could affect it, and even a small bad news could hammer the stock price badly. So you need to be cautious about these things.
Lastly, you must look at the market or domain of the company. If you have heard its name and have used their products, you have a good idea about it and you can think about investing. If you have no clue of what the company does and cannot get good information, it could still be an IPO worth investing, but it comes with bigger risk.
There are many other factors too that can determine whether you make money or lose by investing in an IPO like current market sentiments, economic outlook, interest rates, etc. But these are very difficult to standardize and you have to follow the markets in such cases.
In conclusion, there are several items to consider when investing in an IPO. Investing in a new company without a proven track record in the stock market is always risky; however with some due diligence you can cut down the risks significantly.