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Beware of the IPO lure!
Tue, 30 Jun Pre-Open

There has been a lot of buzz regarding Initial Public Offer (IPO) in this calendar year as compared with 2014. As suggested in an article in Financial Express, more than 30 companies have geared up to raise money through public offers. Some of the big names among them are Indigo, Café Coffee Day, Matrix Cellular, GVK Airport. The companies are raising funds to finance for their expansion needs, repay their debt and to meet the working capital requirements.  In the first half of 2015 eight companies have launched their IPO and have collectively raised nearly Rs 36 bn.

Securities Exchange Board of India (SEBI) has eased IPO norms with its recent guidelines. Certain measures include, reducing the time period for listing of issues from T+12 days to T+6 days which would benefit the issuers as they would have faster access to the capital and investors will have the advantage of early liquidity with them.

However , one must be a little wary of investing in IPOs, During the bull market the market sentiments improve and this makes investors irrational. In the bull markets investors tend to become greedy and invest in stocks which are highly overvalued as compared to their intrinsic value and ultimately end up losing money. Some of the recent public offers have led to investors losing their money on stocks which were overvalued. Some of the examples regarding the same are Monte Carlo Fashions, Adlabs Entertainment, UFO Movies.

Investments in IPO could be one of the riskiest classes of equity investment that a retail investor can make. This is because one is betting on a company which is still testing the waters. Further, there is limited financial  track and access to management meetings. Keeping these aspects into consideration, investors should invest in IPOs only when the company is fundamentally strong and stock is offered at attractive valuation.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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