Everyone talks about making money from IPOs. But does every IPO really give you good returns? How do you know which IPO to apply for, and which ones to avoid? In this guide, I’ll walk you through everything you need to know before applying for an IPO — the key points to check, how to apply smartly, and tips to maximize your chances of profit.
Investing in an IPO (Initial Public Offering) can be exciting. It’s the first time a company offers its shares to the public.
But before you jump in, it’s important to know what to check, what to do, and what not to do.
Here’s a step-by-step guide in plain language with examples so you can invest smartly.
1. Understand the Company You’re Investing In
Before you put your money, ask yourself:
“Do I understand what this company does?”
- Example: If the company makes electric vehicles, think about whether electric vehicles are in demand and how strong the competition is.
- Read the RHP (Red Herring Prospectus) – this is like a profile of the company, available on SEBI/NSE/BSE websites. It explains:
- What the company sells
- How it makes money
- Who its customers are
- Future plans
💡 Tip: If you can’t explain the business to a friend in one sentence, you may not fully understand it – and that’s risky.
2. Check the Financial Health
You wouldn’t lend money to a friend who’s always broke, right? Same with companies.
Key Financial Signals — Plain language + examples
Revenue Trend
Is the company making more money each year?
Profit Trend
Is the company making a profit?
Debt Level
How much does the company owe?
Want this as a downloadable checklist? 📥 Download
3. Understand the IPO Type
Not all IPOs are the same:
- Fresh Issue – New shares are issued, and the money goes to the company to grow its business.
- Offer for Sale (OFS) – Old shareholders sell their shares. The money goes to them, not the company.
💡 Example:
If the IPO is 100% OFS, the company isn’t getting any money for growth – which might be a red flag for long-term investors.
4. Compare Valuation with Competitors
Valuation is like the price tag of the company. You want to know if it’s reasonable or overpriced.
- P/E Ratio – Price to Earnings.
- Example: If the company’s P/E is 80 but similar companies are at 30, it’s overpriced.
- Market Cap to Sales – Shows how much people are paying for every rupee the company earns.
5. Look at the Sector and Growth Potential
Even a good company can struggle if its industry is dying.
- Example: A top-quality DVD manufacturer in the age of Netflix will have a tough time.
- Choose sectors that are growing: renewable energy, healthcare, technology, electric vehicles, etc.
6. IPO Timeline & Details
Know the dates & rules before applying
Keep these handy so your application goes smoothly and you aren’t surprised by deadlines or rules.
💡 Example: If lot size is 100 shares at ₹100 each, you need ₹10,000 to apply for 1 lot.
7. Grey Market Premium (Optional)
Some traders watch the Grey Market Premium (GMP) to guess listing price.
- Example: If IPO price is ₹500 and GMP is ₹100, the expected listing price is ₹600.
- But GMP is unofficial and can change overnight – don’t rely only on it.
IPO Investment Do’s ✅
| Action | Why It Matters | Example |
|---|---|---|
| Research before investing | Avoids hype-based losses | Read RHP, compare competitors |
| Diversify investments | Reduces risk | Apply for 2–3 IPOs |
| Apply with family accounts | Increases allotment chances | Parents, spouse applying separately |
| Use UPI payment | Faster refunds | Refund in 2 days |
| Hold long-term strong IPOs | Gains multiply over years | IRCTC IPO after 2 years |
IPO Investment Don’ts ❌
| Don’t | Why It’s Risky | Example |
|---|---|---|
| Follow hype blindly | May lose money if overvalued | Some IPOs fell after listing |
| Ignore risk factors | Hidden problems affect returns | Pending court cases |
| Borrow to invest | Interest adds to loss risk | Paying EMI with no returns |
| Expect guaranteed listing gain | Markets can turn anytime | IPO lists below price |
| Panic sell on listing day | Miss long-term growth | Zomato recovered later |
Quick IPO Decision Table 📊
| Factor | Good Sign ✅ | Warning Sign ⚠ |
|---|---|---|
| Revenue | Steady growth | Declining |
| Profitability | Increasing profits | Losses |
| Debt | Low debt | High debt |
| Promoter Holding | >50% after IPO | <40% |
| Sector | Growing industry | Declining demand |
| Valuation | Reasonable vs peers | Overpriced |
Summary
Investing in IPOs can give great returns – if you choose wisely.
Always check:
- What the company does
- Its financial health
- Whether it’s fairly priced
- The sector’s future
- Your own investment goals
💡 Golden Rule: If you don’t understand the business, don’t invest in it.
Loved the step-by-step breakdown. Helps in avoiding common mistakes while applying for IPOs