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Understanding IPOs better - A Guide for Beginners!

By Sthitaprajnya Panigrahi

Understanding the stock market can be confusing for many beginners as they remain unaware of the benefits of IPO to investors. An investor at a learning phase should study the market for a while, and learn about why IPOs are exciting and how does an IPO (Initial Public Offering) process work for existing shareholders in order to analyze the behaviour of the stocks, and scrutinize its influence on the share prices. With IPO you can easily make a lot of profit in a very short span, if you are tactful and are able to take timely decisions for generating prolific returns over a period of time. Participating in the stock market can be a thought-provoking task for numerous beginners and before plunging into this ocean of stock market, where depending on the equities purchased the values fluctuate continuously; they must thoroughly examine all the existing stocks and understand the numerous strategies of a company.

As a beginner's Guide on How to Invest in IPO, this article focuses some tips for beginners in stock market.

What is IPO?

IPO is a process in which a private company becomes public by distributing its shares to the general public for the very first time. The company which issues or offers its shares to the public is generally referred as an ‘issuer’, and it functions along with the guidance of numerous investment banks. Once the IPO is successfully completed, the company’s shares are dealt in an open market. The chief reason for a private company to opt for IPO and issue its shares to the general public is to raise money. By vending these shares in open market, the company can accumulate funds to progress its business efficaciously.

Things to Consider Before Investing in IPO

There are three major factors that should be considered by the beginners before investing in any IPO.

  • Study the organization

As said earlier, beginners should study everything about a company before they invest in it. They should read their prospectus, analyze the goals of their IPO distribution, how the company is planning spend its resources, and so on.

  • Staying in sync with the current market trends

Generally, IPOs are closely related to the ongoing market scenarios and present trends. IPOs can become significantly more effective when the present market dynamics is rising. Thus, the beginners should research a bit about the present market trends before investing their money in IPO to reap better profits accordingly.

  • Volume of the application

Considered to be a dependable investment option, oversubscriptions are guaranteed to happen in an IPO process. And if there are more applications incoming, this can lead to fewer shares on your part. So, it is always advised to observe the quantity or volume of applications an IPO is receiving.

Important Guidelines for Beginners

  • Knowing The Purpose Behind Investing

Before advancing to invest in an IPO, it is essential to figure out the pure motive behind your investment. If you are steadily and closely watching the growth of the company and clearly comprehend the sector in which the company is functioning, the markets it has been targeting, and the its future objectives, it is safe to invest your resources in IPO.

One of the prime rules that a beginner should follow before investing in an IPO is not to borrow any funds from anyone but rather invest his/her own money because IPO does not assure returns. Just in case you encounter a loss, all your critical resources won’t be wasted.

  • Big Names Doesn’t Always Mean Big Returns

Several beginners often face sticky situations after investing in big firms or MNCs. As one of the essential tips, beginners should remember that they need not get excited due to the big companies present in the list of important stockholders as well as investment banks and feel compelled to buy the IPO they are backing. Since they have significant funds to invest in, and their calculation scales often tend to be different for their backing.

  • Having a Demat Account

For investing in an IPO, users must have a Demat account, which generally means a simple process of altering all your physical shares into an electric format. Demat account has made it quite easier to deal all the shares in the market and without having a Demat account, you cannot sell or purchase the available shares in the share market. It is necessary for the beginners to open a Demat account via any registered Depository Participants.

  • Wait Till the completion of Lock-In Period

The lock-in period is generally referred as the time period in which the investors are constrained from getting or trading their investments. During this period, no investor can take any major steps to trade their investments. However, once the lock-in period is over, they are free to vend their shares and investments.

To successfully invest in an IPO, one must study the present situation of the business along with its past performance record, possible upcoming biases and specific segment around which the company deals. Although IPO is a pragmatic method to invest money, not all IPO functions exceptionally. Only after doing apt research and proper analysis of a particular organization, beginners can take prudent decisions.

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