Ideaforge opened  for subscription on June 26. The offer is available for the public to bid till June 29. Cyient’s subsidiary Cyient DLM opened on June 27 and closes on June 30. The initial share sale of PKH Ventures is the third mainboard IPO that will kick off on June 30. The remaining four-Pentagon Rubber, Global Pet INdustries, Tridhya Tech and Synoptics Technologies- are in the SME space and are all open for subscription this week. But before you dash in for IPOs, make sure you don’t make the following mistakes:

1. Greed and fear: Stay clear of the greed of multiplying money in hours or days, and fear of missing out. “People invest in stocks because the next door neighbor or the friend says so. On the contrary, investors must understand the basic business model, valuation and growth potential before investing. It is also equally important to understand what is the purpose of the fund that company is raising via IPO, generally, funds that are used for business expansion generate better returns as opposed to the utilization of funds for debt repayments,” said  Mahavir Lunawat, Managing Director, Pantomath Capital Advisors Private Limited, a leading mid market investment bank.

2. Following the herd: The most common mistake than investors make that can be a trap and hinder your financial success is following the herd mentality. “It is very important to analyse an IPO carefully and consider it depending on your future goals and not just because it has a great hype in the market,” said Palka Arora Chopra, Director, Master Capital Services.

3. Inadequate Research: The secret of choosing a good IPO is by doing an adequate research. The critical parameters which need to be consider while doing a detailed and efficient research includes analysing the business model, products services and customers, industry competition, financial health, promoter and management background, risk factors. 

“Retail investors often rely on curated online articles, subscription hype,  grey market speculations, and unsubstantiated valuations to decide about applying for an IPO allotment. The key learning here is to only invest in fundamentally strong businesses after due research. This research involves understanding the company’s business model, its USP, industry scenario, financial health, regulations, and many other parameters. Most retail investors do not have the time and skills to undertake such deep research. Therefore, the best way to tap equity investments is through a low-cost index fund with minimum tracking error,” said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.

4. Ignoring Valuations– Investors generally ignore the valuations of the company. It is an important quantitative parameter as it shows the worth of the company in which you are interested. “Investors should look at the financial ratios, profitability, cash flows, debt obligations and competitor’s performance in the same category,” said Chopra.

Failing to research the company’s financials, competitive landscape, and growth prospects can lead to investing in overvalued or fundamentally weak IPOs.

” Some IPOs are also exit-IPO for current investors, which is often the case when start-ups launch IPOs. Thus, it’s crucial to evaluate whether the IPO’s offering price is reasonable based on the company’s financials, growth potential, and industry comparables. Overpaying for an IPO can lead to unfavourable outcomes,” said Bharat Phatak, Director, Scripbox, a Bengaluru-based digital wealth management service.

5. Paying too much attention to grey market– Grey market may be a valuable tool to gauge investors interest level and the estimating the listing prices but taking investment decision solely on GMP is foolish. “Some sources publish unofficial market rates or premiums on IPOs prior to the issue or its listing. Their authenticity, legality and motivation are unknown. These rates also keep fluctuating and often are not true representations of the future. As a result, basing an investment decision on these inputs can translate to an expensive mistake,” said Phatak.

5. Chasing the brand: The biggest IPO mistakes made by investors that lead to losses in their portfolio are usually failing to understand the company’s business or blindly investing in a company’s IPO just because it has a huge brand name. “Not all large names offer good returns, it ultimately is led by the company’s fundaments, financial stability and growth plans,” said Aayush Agrawal, Senior Research Analyst at Swastika Investmart.

6. Chasing listing gains: When investing in IPOs, investors should look beyond the listing gains. They should rather invest for the long term by doing their own research to understand if the company is fairly valued as compared to other competitors in the industry and focus on companies with sound fundamentals, good promotors, and decent corporate governance, explained Agrawal. 

7. Timing the IPO: “IPO not only stands for Initial Public Offering but it also means ‘Its Probably Overpriced’. IPO’s are generally overpriced and retail investors are better off by not participating in them. Most of the IPOs come at rich valuations and the stock generally trades lower a few months later. 

We believe that the best time to buy an IPO stock is not before or on listing day but six months later,” said Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities.

 Six months is an ideal time for the stock to cool off and consolidate. If six months later the stock is trading above its listing day price and previous highs then one can buy such stock since there will not be any selling pressure in it as everyone who has bought this stock will be profitable, cautioned Sheth. 

8. Failing to understand the business model: Investors should have a solid understanding of the company’s business model, products, services, and competitive advantages. It is essential to delve into the intricacies of how the company generates revenue, its target market, competitive advantages, and growth strategies. Without a solid understanding of the business model, it becomes challenging to assess the company’s long-term potential, evaluate risks accurately, and make informed investment decisions.

9. Borrowing to apply: “The allotment size and chances in good IPOs are small. Many investors are tempted to borrow to apply. Some banks and NBFCs make borrowing very easy. However, investors often overlook the fact that the actual gains after the payment of interest could be minuscule. If one IPO is not successful, it can also result in financial loss,” said Scriobox’s  Phatak. 

10. Basing decision on subsciption data and hot IPOs

When the market opened on May 18, 2012, investor interest showed that demand for company stock was higher than supply. To meet investor demand and make the most of the oversubscribed issue, Facebook increased the number of shares to 421 million. Additionally, it also raised the price range from $34 to $38 per share.

Facebook increased both — stock supply and price — to meet demand and to effectively reduce oversubscription. However, the stocks plummeted in the first four months of the deal. The stock failed to trade above its IPO price until July 31, 2013,” explained IIFL Securities.

To summarise, Richa Agarwal of Equitymaster says: “Investing in an IPO is like investing in any other business. So before you plan to invest in an IPO, check the company’s fundamentals and prospects. However, for an unproven business, a product or service with great potential is not enough. You need to give extra weightage to the quality of management and founders.

You must spend enough time assessing their vision, thought process, and execution abilities. Only once you have a 360-degree view of the business, should you go ahead and invest in one.”