Five questions to ask before you invest in an IPO
Investing in equities is one of the best ways to grow your capital to reach your financial goals. You can either invest in equities through the secondary market, where you buy shares that are already traded in the market or you can invest in the primary market through an IPO or Initial Public Offer.
IPO investments are generally considered very risky since the market has not evaluated the performance of the company. In some cases, the shares lose their value on getting listed and that may take years to recover. However, there are benefits to this as well. The company shares may skyrocket in sometime and you may earn huge profits as well.
It is possible to make smart investment in IPOs by asking a few questions before you invest. IPO investment is not simply investing in a popular issue. It is a legitimate way to increase your earnings through capital gains and dividends. This is why it is better to know the company before putting your funds in it.
Here are 5 questions to ask before you invest in an IPO:
1. Company financials:
Before putting in your hard earned money in an IPO investment, it is important to look at the company financials. There are a few indicators that you can check as a potential investor:
- Sales, operating profits and net profits quarter on quarter
- Expenses and composition of expenses such as sales expenses, administrative expenses, depreciation
- Debt levels
- Assets
- Cash and cash equivalent balances among others
To evaluate the performance of a company, there are certain financial ratios that you can calculate. These ratios measure the performance of the company in terms of utilisation of assets, composition of assets, financial health etc. Some important ratios to calculate are:
- Debt equity ratio which calculates the ratio of debt and equity in the company’s balance sheet. The ideal debt equity ratio is 2:1, which means the debt should not be more than 2 times the equity of the company.
- Return on Equity ratio measures the income earned for the shareholders. This ratio can be compared for each year to find out whether the company is growing its earnings.
- Current ratio measures the ratio of current assets to current liabilities. This helps to understand whether the current assets will be enough to meet the current liabilities when they fall due. The ideal current ratio should be 2:1 at the least.
- Quick ratio measures the quick assets i.e. current assets without illiquid assets such as inventory and debtors against current liabilities. The ideal quick ratio should be 1:1 ideally.
By evaluating these ratios, you can get an idea about the financial performance and health of the company. This can help you decide whether the investment is worthwhile or not.
2. Peer performance:
This is a crucial indicator while making an investment decision. Peer performance should be evaluated in a similar manner to the company’s performance i.e. by checking financial ratios and the expense and income figures. An important part of this analysis is to also look into the sector in which the company is operating. If the company is operating in a distressed sector, or a sector facing a lot of structural issues, it is probably better to avoid investing in the IPO and decide to invest at a later date.
3. Share valuation:
Each company that is about to list puts out its share valuation. There are different types of issues; fixed price issues where the price is decided and a book building issue. In the book building issue, the share price is usually set up as a price band and the final price depends on the different bids received. The cap price is a maximum of 20% of the floor price. The company has to disclose the basis for valuation of shares in their prospectus. The prospectus is available on the stock exchange websites and on the company website.
4. History of the company:
This doesn’t refer to just the financial performance of the company. It also refers to how the company grew to its present size. It also includes information about the company promoters and the current management team. A company’s management can go a long way in determining its future success.
One way to find out about the history of the company and its current and future growth potential is to read the annual reports of the company. As a part of the Director’s Report, there is generally an exhaustive summary on the company’s past and an outlook for the future. It also briefly touches on the management. It is important to look at the number of directors in the company, especially independent directors. The reason for doing such exhaustive fundamental research is because a strong management team will ensure funds are used properly to grow the company.
5. Fund usage:
As per SEBI rules, a company that wants to list its shares on the stock exchange has to disclose the usage of funds in the prospectus. It is important to verify the reason for the company’s listing. A listing is essentially a fundraising exercise. If you’re recommended investing in a particular IPO, you can question before investing in IPO. Most companies use the funds for their growth and expansion.
Besides the above 5 factors, there are numerous other small points that you may want to consider before investing in an IPO. Wondering where you can find these? Well, you can refer to the research reports by experts in the field. You can find such reports from IndiaNivesh Ltd. and you can get them by opening an account with IndiaNivesh Ltd.
If you’re wondering how to invest in IPO in India, there are two ways:
- Offline investment
- Online investment
In an offline investment, a form needs to be filled up by the investor and share ASBA account details. This needs to be submitted to your broker who will enter it in the system and submit your application.
Online investment in an IPO is possible through your trading account. If you’re thinking on how to invest in IPO online then you can check your online trading account for an option to put in a few lots. Once the issue is closed and shares are allotted, the money will get debited from your bank account.
By making sure you do adequate due diligence, you can ensure you use an IPO to grow your capital.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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What are futures and options?
When it comes to the stock market, there are different instruments for investors to put their money in. One such mode of investment for short-term traders and investors is futures and options. What are futures and options? Futures and options are derivative contracts. Derivatives are instruments whose value is determined by an underlying asset. For example, a stock future’s value is determined by the price movements of the underlying share. A copper commodity option’s value is based on the price movements of copper. Derivative contracts are basically a contract between two or more people with regards to the underlying asset. These contracts are not settled. Only the price difference is exchanged between the parties. Basics of Futures and Options: Let us understand futures and options meaning. Futures: A futures contract is an agreement between two or more parties where the delivery is fixed or committed. The difference between the market price and the contract price will have to be paid on delivery of the contract. A futures contract binds the two parties, i.e., the contract has to be settled. This means that at least one party benefits from the contract. A futures contract can be based on any of the following: • Stocks• Exchanges• Commodity• Currency Futures contracts must be settled between the parties even if one of the parties makes a loss in the process. The settlement date is usually mentioned in the futures contract. There are two positions you can take in a futures contract. You can go “long”, which means you can decide to purchase or you can go “short” where you decide to sell. Options: Delivery or settlement in a futures contract is mandatory. However, in an options contract, you have the choice whether to settle the contract or not. It gives the investor a right but not an obligation to buy or sell the assets. This means an options buyer can disregard settling the contract if he finds there is no profit in it. The option holder can exercise the option at any point of time before the settlement date as well. When buying an option, you need to pay a small sum called option premium. In case you don’t wish to settle the option, your loss will be restricted to the option premium amount paid. There are two types of options contracts: • Call option• Put option In the call option, you go along with regards to the underlying asset, i.e., you are bound by the contract to purchase the underlying asset. A put option is the exact opposite where you are bound by the contract to sell the underlying asset. A call option trader believes the price of the underlying will exceed the contract price. In contrast, a put option trader believes the price of the underlying asset will fall below the contract price. It is very important to understand the futures and options basics before investing in these instruments. Derivatives are inherently risky since the price movements cannot be predicted. You may want to take help from the research reports that are given by experts at IndiaNivesh Ltd. that will help you better understand the futures and options market. How to trade in futures and options? Futures and options are standardised contracts that are governed by the stock exchange rules. Since these are standardised, the minimum quantities of underlying assets are already stated by the stock exchange. The contracts between the two parties are fairly consistent with only the underlying assets, the delivery date and the price changing. To invest in futures and options, you need to open a demat account and a trading account with a reputed broker like IndiaNivesh Ltd. It is possible to purchase futures and options online since these are listed on the stock exchange. You can pick the futures or options contract you want to invest in through the trading account. For example, if you wish to purchase one lot of the index futures, you can pick that on your trading account and invest in it. In case of options, you need to pay a premium on the options contract. The prices of futures and options change every day. As a trader, you can decide to sell your futures or wait till the end of the contract. These contracts can generally be of the following durations: Near month – one month Next month – two months Far month – three months The profit or loss on futures and options is calculated daily and either debited or credited from the trader’s margin. To trade in futures and options in stock market, each trader needs to maintain a margin amount with his broker. When a derivative contract is purchased, the entire amount doesn’t have to be deposited. Only a small margin amount has to be deposited. The profit or loss isn’t debited or credited to this margin account unless the derivative contract is sold or settled. In case the minimum margin amount is reached, the trader gets a call to infuse further funds into the margin account. Brokerage on futures and options has to be paid when the futures or options contract is bought or sold. A futures contract is settled daily and the value is carried forward the next day. For example, suppose a trader purchases Nifty futures for 8000. The first day, the Nifty goes down to 7900. This means the trader has made a loss of Rs. 100. This loss is debited from his margin account and the price of 7900 is carried forward the next day for settlement. This is called Marked to Market or MTM settlement. When the futures contract expires, the price on the day before the settlement date is compared with the spot price and the difference is settled. The settlement for options contracts are a little different. While purchasing options, a premium has to be paid. The entire premium amount doesn’t have to be paid, only the difference based on premiums outstanding and receivable for each investor. The options trader has a choice to sell the option before expiry and book his profits. The system automatically settles options contracts by matching them on expiry. The settlement value is the difference between the options value and the spot price. Derivatives are complicated instruments which require a level of expertise before investment. If you are considering investing in F&O segment, then it is better to get the futures and options basics understood perfectly before investing to prevent losing any money. Be sure to restrict your trades till you get experienced to reduce your losses. However, if you’re a savvy investor, derivatives provide another means to earn from the price differentials in the market. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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SIP Investment – Steps to Know How to start SIP investment plan
How to Start SIP InvestmentInvestors are always in search of new investment avenues to park their savings. They want to invest in those investment options that are less risky and have the ability to generate consistent returns for the long term. One of the investment avenues that can fit into almost all the criteria for an investor is investing in mutual funds via a Systematic Investment Plan (SIP). In this article, you will learn about the basic details of the SIP and its related information.First, let us understand the meaning of Systematic Investment Plan.What is Systematic Investment Plan?SIP is one of the simplest forms of investing in the mutual funds. You need to decide the SIP investment plan, an amount that you would like to invest regularly. The investment in the chosen SIP can be made in instalments on a weekly, monthly or quarterly basis. A fixed amount is deducted from the savings account and directed towards the mutual fund scheme selected by you.Let us now learn about how to start SIP investment.How to Start SIP InvestmentSystematic Investment Plan is the most flexible and easiest way of investing in mutual funds. Once you figure out how much money you would like to invest in the SIP investment plan, the task becomes even easier. Often you want to invest big in the mutual fund schemes but lack of funds do not allow you do so. This is where mutual fund SIP investments are handy as you can invest small amounts at regular intervals. This further makes you a disciplined investor. The procedure for an SIP investment plan is as follows:Procedure to Start Systematic Investment PlanStep 1: Complete Your Know Your Customer (KYC)The first and foremost step for mutual funds SIP investment is completing the Know Your Customer formalities. To be able to invest in a SIP investment plan you must be KYC compliant. You must complete all the necessary paperwork and submit the following documents: Address Proof (driving license, passport, Aadhaar card, voter id, etc.) Passport size photograph PAN card Cheque book (for bank details) For online SIP investment, you may visit the website of a renowned broker such as IndiaNivesh Ltd. that provides the facility of electronic KYC, i.e., eKYC. During the eKYC process, you must upload the necessary documents on the respective website. You can even complete your KYC through in-person verification. For that, you will have to schedule a video call appointment and confirm your identity through webcam. At this stage, you can get your details verified by showing your PAN card and address proof. There is one more option through which you can complete your KYC. You can use your Aadhaar card and complete the process. For that, you need to comply with the following steps: Fill your Aadhaar number Enter the one-time password (OTP) sent to your linked mobile number The basic details would be filled automatically after OTP submission No video call verification is required With the Aadhaar based KYC, the maximum limit for investment is Rs. 50,000 every year. To enhance the limit, you must submit your PAN card details. KYC compliance is a one-time procedure and once it is completed, you can invest in any mutual fund scheme.Step 2: Select Mutual Fund SchemeAfter completing your KYC, the next step is the selection of a mutual fund scheme. While selecting the mutual fund scheme the following points must be considered: Duration of the investment Level of risk tolerance Financial goals Experience of the fund manager Track record of the Asset Management Company Performance of the fund Consistency of the fund in giving returns Fund’s expense ratio Note that the above-mentioned points are not in the order of importance.Selecting a mutual fund could get easier if you have your demat and trading account with a reputed stock broker like IndiaNivesh Ltd. because we offer hassle-free services and continuous support to the investors. Step 3: Register for SIPThe next step is the registration of the SIP mutual fund scheme. You can register for online SIP investment by selecting the link for registration of a new account and filling the form. Create an ID and password for mutual funds SIP investment. Give the details of the bank account from which money will be debited.The above mentioned steps will help you in starting a Systematic Investment Plan. However, there are many misconceptions in the mind of investors when they start an SIP. Let us now clear some of the misconceptions about SIP.Misconceptions about SIP Avoid Investing in SIP when Market is High Often investors believe that it is better to avoid SIP investment when the market is high. Investors feel that they can purchase only few units of the mutual fund scheme when the market is high in comparison to the number of units they could have purchased when the market is low for the same amount of money. However, this should not be the approach. SIP is a disciplined way of investing. Investors should never try to time the market. By investing in all the phases of the market, investors get the benefit of rupee cost averaging. SIP gives Low Returns as compared with lumpsum investments in same mutual funds The investors who believe that SIP as compared with lumpsum investments in same mutual funds gives low returns are wrong. In fact, in many cases, SIP has the potential to outperform lumpsum investment options in terms of giving returns because many things can go wrong if you do not time the market well. SIP in mutual funds has to be with large sum of money One of the myths about SIP is that it needs a large sum of money. However, this is not true. You can start an SIP with an amount as low as Rs. 500.The above mentioned points clear some of the misconceptions that people have about Systematic Investment Plan. SIP is one of the most flexible types of investment which can be updated or cancelled anytime. There are many advantages of taking an SIP in comparison with investing a lump sum amount. If you are looking to invest in SIP or need to know the best SIP plans, you can contact IndiaNivesh Ltd. We recommend SIP plans after understanding your financial goals and risk appetite. With our advice and guidance, you can invest in right mutual fund schemes. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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