Quality And Valuations Should Be The Primary Concern For IPO Investors

The initial public offering, or IPO, market has been booming for quite some time now, and different kinds of companies are regularly making their way towards investors. This underscores the importance for investors to make informed decisions, as it significantly influences the quality of their portfolio. The kind of strategy that they implement while investing in these issues also becomes a point to consider, as this will determine the risk that they take.

At such a time, it is better to focus on the core issues while making a selection. Here are the key areas one should concentrate on:

There are different companies looking to raise money in the IPO market, and as time goes on, the type of growth will determine how these companies fare.

Recently, there has been a growing interest from various foreign-owned companies to enter the market, which presents a unique opportunity for investors. As compared to smaller companies, these are more stable, both in terms of their business and the way they operate. It is likely that their fundamentals will also provide an element of comfort for the investor. In this sense, it is important for the investor to look at the size and type of companies that they are investing in, because this can make a difference when the going gets tough. Under those trying conditions, the stronger companies will remain stable and move on to the next stage of growth.

There is a wide variety of choices for investors when it comes to selecting companies that are coming out with an IPO. In this regard, one also has to look at the sectors that the companies are operating in. Just because there is a boom in the market, it does not mean that every company in every sector will do well. There are sectors where the competition is intense and where investments and brand names play an important role. In contrast, there are emerging and new sectors that present numerous opportunities. Both of these situations have their own risk-reward equation, and the investors need to make a choice about the sectors that they want exposure to.

One of the most important points that any investor has to consider while investing in the primary market is the valuation that they are paying for a company. It is commonly known that during periods of prosperity, there can be numerous instances where the price of a company becomes excessively high, which can significantly impact the investor's future returns. Several sectors are experiencing significant froth, which could result in an IPO price that is excessively high. The valuation must be considered in light of the other two factors mentioned earlier, which are the size and type of company and the sector in which it operates. The valuation level has to give comfort; otherwise, it might be wise to wait for them to return to comfortable levels.

There can be a mixed strategy when it comes to adding companies to the portfolio. The IPO market can serve as an initial gateway to a company that may make sense for an individual's portfolio, but it is not necessary that this is the only way to gain exposure.

An investor, based on the valuation and other parameters, can use a mixture of both the primary and secondary market to ensure that they are taking the right kind of exposure. This allows them to make the various purchases in the manner and at the price and quantity that they are comfortable with.

Arnav Pandya is founder of Moneyeduschool