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There’s a first time for everything: An insightful guide to valuating IPO

Reward and risk go hand in hand, so it is better to assess the type of investor you are before investing in an IPO.

studio18 Last Updated:August 29, 2023 17:40:13 IST There’s a first time for everything: An insightful guide to valuating IPO

IPO is a very familiar term, most of us have heard as we grow up. In layman’s terms, an IPO is when a private corporation is offering shares to the public for the very first time to raise equity capital from public investors.

For investors who put their faith and diligence in this company, this might just be the gold pot at the end of a rainbow. Therefore, being an informed investor is very vital in the financial world. Like everything even IPO’s have their own set of pros and cons. Though, an IPO would be a good way to go to get handsome rewards, not all IPO’s may have the same reaction. Reward and risk go hand in hand, so it is better to assess the type of investor you are before investing in an IPO.

Here are 5 reasons why companies release an IPO in the market:

To raise capital for growth and development.To enhance public image and help with branding.For wealth creation, that is distributed to investors.Acts as a base for share listing credibility and creates transparency when seeking to borrow funds.A win-win situation for company and investor. Company gets financial support while the investor gets financial benefits.

So, who can invest in an IPO?

Any person who is interested in the IPO offering and the company can invest. Apart from individuals, staff, friends and family of the company going public might be offered a chance to invest in it. Institutional investors such as hedge funds or institutional banks play an important role since, they own more than 80% share in the company after the IPO is released. The also act as the original investors for the company. Retail investors and anchor investors can also invest in an IPO.

But what or more likely HOW does one valuate an IPO? Here are a couple of factors that are taken into account:

Growth of the company:

Since the main aspect of an IPO is to raise capital, the valuation of the same is determined by the growth prospects of the company. The company’s future forecasts and growth rate will be able to tell the investor if they have made a fruitful investment or not.

The number of shares in the IPO bidding:

A charting pattern is formed in order to map out the number of shares going out to the public. This is done because of the already existing shareholders of the company.

Competitor analysis:

Knowing who your competitors are in the market go a long way. This helps companies analyze at what price to consider for the IPO and how many shares to give out to the public. This will also give the company an idea of their rank or position in the market scenario.

Sustainability of the company:

This determines if the company is in for the long run. Various company have different business models depending on their sector and operations. The efficiency and effectiveness of the business model decided by the underwriting team who valuates the IPO.

Market trends and demands:

Understanding the share market trend and demand is a crucial factor. Issuing the IPO at the wrong time might lead to several losses for the company and restrict their chances of gaining additional financial resources. This would also take a heavy toll on the existing investors.

Therefore, IPO valuation is an important step to take before investing in an IPO. These prices are also influenced by many other factors like economical factors or even the sentiment of the market. So as an investor it is better to study the fundamental history, trends and financial statements of the company.

This is a Partnered Post.

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