Visible participation of investors in public shareholding of an enterprise at its initial stages of public ventures in the territories of the Initial Public Offering (IPO). However, investors should exercise caution, along with awareness, with the incoming blabber of IPOs across the board. Investors must ensure understanding to sidestep common mistakes when new IPOs are announced.
- Not Researching the Company Properly
The common mistake investors make is subscribing to an IPO without understanding the company thoroughly. Decisions not anchored in facts often arise from media hype and peer recommendations. Every company coming out with an IPO must provide a Red Herring Prospectus (RHP), declaring financial statements as well as the business model, promoter background, risks involved, and why funds are sought.
- Ignoring Valuation Metrics
Valuation is another vital piece investors often ignore when subscribing to the IPO. Many investors only look to the noise around an IPO and do not analyze whether the stock is reasonably priced against other listed peers. Investors should visit these key metrics: Price to Earnings (P/E), Price to Book (P/B), and Earnings Per Share (EPS).
- Subscription with No Investment Objective
Some investors enter the IPO subscription process without clear objectives. Some aim for short-term gains at listing while others seek wealth accumulation for longer terms. Such undefined objectives can result in disappointment or quick action decisions soon after allotment.
- Beyond Grey Market Premium (GMP) and other Unofficial Trends
Too many would-be investors allow their inclination to Grey Market Premiums to sway their decisions regarding IPO subscriptions. Although GMP may mirror investors’ feelings regarding the company’s prospects, it serves as an unofficial and unregulated indicator. Thus, laying too much stock on GMP may lead investors to misleading considerations.
- Ignoring or Unaware of Lock-in Periods and Promoter Holding Commitments
Another element that investors forget while subscribing is the lock-in period and promoter holding details. Following a shorter lock-in for anchor investors or a lesser promoter stake post-issue suggests that there is some long-term confidence in the business.
- Applying Under Multiple PANs
Some investors apply from multiple PANs, attempting to increase their allotment chances; this practice is not allowed. Under the Securities and Exchange Board of India (SEBI), an application per PAN per category is the only application permitted. Any attempt to submit multiple applications will end in all applications being rejected during scrutiny.
- Not Keeping Sufficient Funds in the Bank Account
Such importance given to rushing to subscribe to the IPO seems to lead investors to forget that they need to have enough funds in the linked bank account. With the Application Supported by Block Amount (ASBA) system, the application amount gets frozen until the allotment is completed.
Even if that’s not enough at the time of application or gets debited after applying, it will result in rejection of the application. Investors must ensure that their account has been credited with sufficient funds before applying to see to it that the application for the IPO will remain valid.
- Ignore the Market Conditions
Broader market conditions often affect the performance of IPOs. Ignoring market trends or economic signals may lead investors to apply when there is volatility or uncertainty. Besides, even if prediction is difficult, current sentiment can make it easier to understand expectations regarding listing day performance. Investors should keep an eye on interest rates, global cues, and particular happenings across sectors to clarify if an upcoming IPO is indeed timed just right.
- Not Diversifying
Some investors even invest a significant amount of their portfolio in IPOs when there are several issues in the pipeline. While upcoming IPOs can be incredible, putting a large share of one’s capital in one or a few new issues may expose them to much higher risk. Investors should diversify their portfolios, containing various types of asset classes and sectors, to reduce the volatility associated with new issues.
- Skip Watching after IPO
After allotment or listing, many investors stop watching the company. However, for informed decisions on the post-listing performances of companies, announcements, and quarterly results, this exercise is necessary.
Conclusion
From an investment perspective, IPOs can serve as an essential step in the journey. But besides doing these, investors must also avoid common mistakes in the issue subscription process. Citing some of these mistakes gives the impression of knowing research, valuation, compliance, and alignment with one’s investment goal, such that investors can approach the upcoming IPO offer prudently.
