For a regular investor, investing in an IPO is risky. After the stock is started trading publicly, oftentimes it dips down into negative territory. This is something that IPO investors should consider before participation. Moreover, IPO stocks have a tendency to swing strongly.
There’s a chance you’ll get major gains, that many people do. If a stock ends up excelling, early investors get the greatest reward. But because a company that wants to go public is seeking capital, they tend to start the IPO process when their performance is up.
One thing is obvious, you should always DYOR (Do Your Own Research) before participating in an IPO.
6 Tips to Check Before Investing in an IPO
- Check the business details. Sounds obvious, but just read the IPO description. If you don’t understand it - pass. It’s not you, it’s them who couldn't make things clear. Companies must be very straightforward about what their product/service is, the problem they are solving or the gap in the market they are filling and the way how they are going to earn money.
- Check the risks. The current market conditions, competitors (and their performance), quality of the product/service and possible regulatory changes. Company specific risks can be found in the IPO description.
- Check key people. Co-founders, CEO, CFO, CTO. Google directors and managers, one piece of negative press may be a misunderstanding, but many negative articles may be a red flag.
- Check the financial details. Financials are an important factor in the long-term success of the business. Many companies may be unprofitable yet when they go for an IPO, but the company should show at least strong continuous growth to deliver good results in the future.
- Check the valuation. If a company is overvalued at IPO, it may decline upon listing and so your investment may be better placed once the shares are trading. Compare the IPO valuation with the competitors that already traded publicly.
- Check the lead underwriter. IPOs with a well-known underwriter are often more reliable, because those investment banks tend to protect their reputation and choose wiser which companies they lead to an IPO.