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Companies are raising money through IPOs. Investors are also getting good returns. However, given that few IPOs in past few years have been a major disappointment and that is raising few questions. So, should retail investors look to sail the current ride? If you want to invest, what should you keep in mind? What are the risks of IPO market?

Most of the IPOs listed this year have come at a premium. These have given positive returns to shareholders. In this year, that is, in 2023, 34 IPOs have been listed on the mainboard so far. Out of these, more than 100 percent return in three IPOs. Between 50 and 100 percent return in four IPOs and returns between 10 and 50 percent in 20 IPOs. Negative returns have only been seen in three IPOs, which means investors are still in a loss. Now let’s talk about what to look for before investing and what to pay special attention to. First, check the company’s financial condition.

Analyze the company’s financial statements from the previous years. How much revenue was generated? How much profit was made? Is the company consistently profitable or not? How much debt does the company have? All this information can be found in the draft red herring prospectus (DRHP) submitted to SEBI for IPO approval. In the DRHP, the company also discloses its weaknesses. Like if there are any disputes or legal cases related to it. Keep in mind that in the case of financial results, you should look at figures for at least the past five years.

Don’t rely solely on the financial figures of the past two to three years because companies often try to improve their numbers in the run-up to an IPO. Additionally, it’s essential to assess the company’s promoters and management team. These individuals are responsible for critical decisions in the company. Strong, trustworthy, and experienced promoters will lead the company to progress, and you’ll receive good returns. Similarly, you should also look at the valuation of the company’s shares. If the company seems overvalued it’s better to stay away from it. To check this, see at what price other similar companies were listed. Furthermore, it’s crucial to understand whether the promoters are selling their existing shares in the IPO, meaning it’s an offer for sale, or if new shares are being issued.

Investing in IPOs that issue new shares is preferable. Gather this information from the IPO prospectus whether the IPO funds will be used for expansion or to pay off company debts or to buy shares from founders or investors. If a significant portion of this amount is being used by the company to repay its debt or to buy shares from founders or investors it’s advisable to avoid investing.

When investing in an IPO, it’s also essential to consider the current state of the stock market. If the market is bullish, the listing may happen with momentum. If the market is experiencing continuous declines, the IPO could open with a cautionary sign. Stock market expert Dr. Ravi Singh advises that when investing in an IPO, investors should gather in-depth information about the company, its competitors, financial condition, significant cases or disputes, and the overall industry health, i.e., the sector related to the company. So, in summary, it can be said that IPOs provide an opportunity for ordinary investors to make good money in the stock market. If investors exercise caution and conduct thorough research before investing you  can avoid losses.