3.14 Tips For The Investors
How can anyone decide about a new issue especially since in spite of most companies being genuine there are some who may wish to exploit the investors? An investor must therefore identify the future potential of a company before applying for an issue. The mandatory disclosures allow the public to know the reason for raising the money, the way the money is proposed to be spent, the returns expected on the money, and so on.
- Read the offer document of the issue completely. Otherwise, read the application-cum-abridged form for the basic details of the company.
- Consider it as an investment but not a channel for windfall gains overnight.
- The company’s value is important than the company’s brand and reputation.
- Ensure that you get the refund orders or allotment orders or both on time. In case of any delay one has to immediately approach the registrar.
- The lesser the number of shares you apply for, little are the chances for allotment. Therefore apply for a large quantum of shares.
The best reason to invest in any IPO is your belief in the company. Often companies that are going public or are listing their shares for the first time offer their shares cheap and go on to become very successful. IPOs thus offer investors the chance to participate in their prosperity without making huge investments. Gain is the chief attraction of buying in the primary market. But don’t let it be the only one.
Here are the ways and means of playing it safe:
Media campaigns can mislead people.
IPOs are normally heavily advertised in the media because the company wants maximum publicity to ensure the success of their IPOs. A great campaign does not reflect on the company’s future prospects.
Before applying for the IPO be sure to read the prospectus for the issue.
Documents share the details of company and contain plenty of information about the company's financials, its track record and what the management plans to do with the money it is raising. Make sure that you know enough about the company and are confident about its management and growth prospects before investing.
Look at the price.
Remember that it is not enough to invest in a good company. The price at which the IPO is being made is equally important. It is no use if the company is excellent but the price of its issue is sky-high. In such situations, second tier companies may be better investments, if the price at which they are being offered is cheap. You can check this out by ensuring that the price is being made at a price to earnings ratio which is in line with other comparable companies in the industry. The price to earnings ratio is the market price of the share (in the case of an IPO, the issue price), divided by the earnings per share (EPS). Earnings per share = Net profits / total number of shares. P/E ratio = Market price / EPS.
Don’t get fooled by the ‘at par’ sales pitch.
Whether a company offers its shares ‘at par’ or at a premium is of no consequence. Par value is merely the face value of a share. Many promoters hype the fact that they are offering their shares at Rs 10, or at par, as if they are doing investors a big favour. The point is that the par value of a share is an accounting decision a company makes and bears no relation to its intrinsic or market value. For example, a share of Infosys has a par value of Rs 5 but was quoted in the market at Rs 1,165 on December 19, 2008. Therefore, don’t bother about whether the shares are being issued at par or at a premium. Instead, check out the price-earnings ratio and the growth prospects for earnings. This we shall cover in detail later in this course.
Don’t get swayed by current prices.
If a company that is already listed (has its shares for buying and selling on the stock exchange) is coming out with a fresh tranche of shares, it is called a new issue. Prices of the smaller new issues may be manipulated in the market to keep prices high before a new issue is announced. So don’t go by the fact that the new issue is being offered at a discount to the market price. As mentioned above, check whether the price offers good value.