IPO – The Trending Saga: A Complete Guide and Disclaimer

IPO is  very much trending these days as it is the rich source of wealth generation for companies and also increases the potential of high growth for investors. Companies think of getting popular among the common crowd through this offering. But do you know what this concept actually is ? 

Come , let's explore it together. 

Definition of IPO

An IPO or Initial Public Offering is the first time a private company sells its shares to the general public and lists them on a stock exchange. It is a very simple way to increase the capital of the firm. It is a very unique way to attract a large audience as people are more curious to explore new things that emerge in the market arena .

Is it necessary for IPO to be registered in the Stock Exchange ?

Yes, it is legally mandatory

          Let's understand why ? 

1) Easy Buying and Selling - Through listing , it becomes easier for investors to sell and buy shares in the market .

2) Exploring prices - The exchange uses a market quotation to explore fair market value on the basis of public mandate .

3) Regulatory Mandate - Stock exchange regulators like SEBI ( SECURITIES AND EXCHANGE BOARD OF INDIA) make  registration to be considered essential in order to save investors from incoming peril.

4) Building Faith - The trust that company builds on getting registered on a Stock Exchange,  indirectly gives assurance that they are investing their money at the  right platform.

Before you use any product or avail any service , some kind of instructions along with precautions are always given so that the customer gets fully aware of , as it can have a downside potential too .

Let's understand it's DISCLAIMERS :- 

1) Explore the Business -

Before investing,  it is essential to understand by what way it incurs money and how long its growth is going to sustain. Also check whether growth is not only by way of offering discounts. Alongside revenue should also be taken into account. 

2) Don't Just Observe Profit, observe Statistics - 

Look at margins , return on equity and debt to equity ratio. Increasing liabilities can signal manipulation of working capital. Negative cash flow in companies due to expansion is not always a danger sign at initial stage .

3) Beware of warning signs 

i) Major exit by promoters 

ii) An obscure auditor 

iii) Frequent changes in CFO/ CEO in 3-4 yrs preceding the IPO 

THESE ARE MAJOR RED FLAGS 

4) Don't rely blindly on listing gains - 

Listing gain strategies are merely based on /built on speculation. There entails no promise of getting stock alloted or incurring profit , but interest on borrowed money must be returned back . Therefore IPO investment using borrowed funds should be extremely avoided. 

5) Check where your investment goes ?

Money raised through an Offer for Sale does not go to the company. Raising capital vs Fund expansion are solely different concepts and has nothing to do with profit of individuals who invest .

Conclusion

IPO is indeed a very interesting topic to explore for the new investors who wish to invest at an initial level just to understand how it works. Looking at the disclaimers , we can easily decode that lot of risks are involved . Invest wisely as it does not take guarantee of your profit 

Designed By 

Komal Nagarkar