An opportunity to invest in an IPO at the start of its journey may sound hugely exciting for a retail investor. But just because an IPO is open to retail investors, it doesn’t mean that it is an invitation that should be taken up. If an investor is considering investing in an IPO, here are some things to consider:
- The prospectus! This may be the most important item related to an IPO to thoroughly read and scrutinize in the absence of research on the company. The prospectus will tell an investor the history of the company, its ownership structure, its position in the market and growth prospects. However, investors should also understand that the prospectus is likely to be relatively upbeat on all fronts!
- Why is the company coming to the market? Are the private equity owners looking to quickly offload their investment and turn a quick profit? How will the company fare post-IPO? These are important things to consider.
- Who are the brokers? It’s commonly believed that big brokers tend to bring reliable and reputable companies to market.
- How much to invest? It’s common for retail IPOs to be oversubscribed and thus share allocation scaled back, so an investor will not always get as many shares as they hoped for. Therefore, an investor may consider investing a little more if it expects an IPO to be oversubscribed.
- Is it better to wait for the lock-up period to end? The lock-up period prohibits directors and large-scale owners from selling shares in the company for a specified period following an IPO. Some believe that those directors and large-scale owners who continue to hold their shares post the lock-up period represent strong belief in the prospects of a company.