IPOs (Initial Public Offerings) are means of raising capital and means of getting listed in a stock exchange for a company. An IPO happens when a company decides to raise capital by offering its shares to investors.
While IPOs are an attractive investment avenue for any investor, it is important to avoid making mistakes while investing in IPOs so that you don’t lose your hard earned money.
Buying a stock at an IPO price does not necessarily mean that an investor is buying it at the lowest price. It is simply priced in accordance to how much the market is willing to pay based on surveys done.
Some IPOs may be viewed as relatively low priced based on growth prospects whereas others may come across as expensive. Until the IPO is finally traded on the stock exchange, you will never know where the stock is going to end up.
So let us look at 5 of the most common mistakes to avoid while investing in IPOs:
- Do not lose an opportunity to make positive investments. Cash in when you feel the time is right. Avoid making the mistake of clinging on even when you don’t trust the issue.
- Most of the investors rush to accumulate stocks of the new issue on the first trading day itself, which is wrong. You need to wait out and settle before you start accumulating.
- Do not follow hypes and unnecessary publicity created around a new IPO. This may induce a wrong subscription, which in turn can result in loss of invested amount.
- Investing on brand recall is another common mistake. Investors generally tend to subscribe to an IPO having a familiar name. This can be a big mistake as a familiar name might not be a profit bearing investment every time.
- One of the most common mistakes that an investor make while investing in an IPO is investing without a stop loss. Stop loss is very important to reduce the risk of loss (more than a certain bearable level). Managing your risk is always more than investing in an IPO. Thus, it is important for an investor to plan his stop loss to protect his investments.
These 5 things will always help in protecting your investments and enable an investor to take sound decisions with respect to investments in an IPO