Myths, Do’s & Don’ts About IPO Investment

Myth About IPO Investment: Investing in an IPO provides good potential to earn in the short term

One needs to open a commodity trading account which will enable the user to trade across the registered exchanges. If a person intends to participate in deliveries, the local sales tax requirements have to be fulfilled, or they can use the C&F (Cost and Freight) agent services.

Do I need to take delivery of the commodity compulsorily every time I put a trade for it?

It can be true in good times but not in bad times. When there are volumes in the market, performance is at its peak, usually IPOs get oversubscribed and there's huge anticipation of a good opening. This leads to a high listing price which is more than the subscription price and thus gives you better returns on your investment even in the short term.

It is better to invest in the secondary market than invest in an IPO

Many investors consider this to be true but this is a subjective matter which does not imply the same for everyone. Some investors may find it interesting to invest to an IPO while others may find it more convenient to invest in the secondary market than invest in an IPO because of the fact that your money gets blocked for about a month with no surety of getting an allotment.

It is all dependent on an individual comfort level and thus there's no thumb rule for the same.

Do’s and Don’t About IPO Investment Get a copy of the prospectus and read it carefully

Many times when you go to purchase an IPO form, you may not get the red herring prospectus unless you insist on getting one. Make sure that you receive the prospectus along with the form and read through the prospectus carefully to understand the terms and conditions of investing in the same. This will also give you a direction to the risk and reward involvement in such investments.

Analyze the investment opportunity before you invest

Before you actually invest your funds into an IPO, gather knowledge as to the whereabouts of the issue, promoters, past performance of the company (which has come out with such an issue), how is the allotment likely to take place, and the risk-reward involvement in the same.

In a bid issue, bid at a price you think is appropriate for the IPO

Whenever it is a big issue, do your own analysis and come to a conclusion as to what should be the precise price for the IPO. Don't bid for the issue as per what other people are bidding. Sometimes an issue can be overpriced than its actual worth and you may end up shelling more money than needed to acquire the same.

Don't put all your money into an IPO

Don't put all your lump sum money into an IPO as your money gets blocked for a certain period of time which may extend up to a month. If you require the money invested for some other purpose, you may not be able to utilize it till the time settlement for the same has been done. Hence, don't all your surplus money into an IPO.

Don't borrow to invest

One should never borrow money to invest in any kind of security as the risk involved in investing may cause you to suffer loss and thus the money borrowed will not be there to be paid back and you will have to pay interest applicable on the same even when you are in loss. This can result in trapping yourself in a debt trap while you will not be able to gain anything out of it.

Don't fall for any lucrative rumor about the IPO

If you have come across any news or rumor about an IPO that seems to be very lucrative, be careful about what you hear and the facts about the same. Find out the truth, and facts supporting such news or rumor, analyze the opportunity as an investment opportunity, and then invest in the same if you find it genuine enough.

Which are the registered commodity exchanges in India?

There are 4 commodity exchanges that deal in commodity derivatives. A few of them include the Multi Commodity Exchange of India (MCX) and the National Commodity and Derivatives Exchange of India (NCDEX).