December 7, 2021

The World Stock Markets Tips & Targets, News, Views & Updates

The World Stock Markets Tips & Targets, News, Views & Updates

Dabbling in the stock market via IPOs? Run these 5 investment checks first

Updated: 23 Nov 2021, 02:07 PM IST

That prospectus holds Biblical value

2/6

That prospectus holds Biblical value

The company prospectus is a holy document which invites the potential investor into an offering and contains the bid range, the minimum bid and the opening and closing dates of the IPO. Make sure you don’t miss the price band. With the trend of loss-making companies introducing their IPOs into the market, sometimes the price range depends on the bids received. This is an expectation game. It would be wise to give a standing instruction to your broker as to what would be the minimum number of shares you would like to acquire and at what price range.

Also read: To invest in IPOs, you can also take the mutual fund route

Getty Images

Ownership of investment account

3/6

Ownership of investment account

Investment for the IPO can be made from either an individual or a joint account. Familial dynamics have changed significantly and continue to, it would thus be prudent to discuss with your joint account holder whether they feel comfortable with the process. Document the same in case of eventualities that affect relations. There could be a contractual arrangement among family members for a specific class of investment, where they agree to the risk potential within the range. These could be multi-party agreements which take into account the addition to the family and serve as a ‘go-to’ document in case of uncertainties. The contract could also contain confidentiality arrangements so that nobody has access to it other than who you decide to give access to. This can range from a nuclear familial contract to a joint family arrangement.

Getty Images

​Get a true, fair picture of the company

4/6

​Get a true, fair picture of the company

The Draft Red Herring Prospectus (DRHP) is the best document to uncover historical events of the company and the relationships that it has with other firms. Always look out for what is being proposed by the company while selling you the shares. Pay importance to the essential feature called ‘Risk Factors’ to find a fit with the risk being flagged in the DRHP with your individual or joint risk appetite/s. There is an increasing trend of litigation against a company which may bring down large corporations or revive them. The section called ‘Outstanding Litigation’ gives you a view of the likelihood of the litigation ending in favour of the company you are considering investment.

Help yourself with the DRHP’s ‘Market Overview’ which the company is obligated to at the time of listing. Use this to your advantage and sieve it thoroughly for pitfalls that you may foresee. It is also quite probable that the company that you are keeping track of is being listed. However, it is a must to understand the financial details of any company, especially of an unlisted one, before investing.

Also read: What’s the role of an IPO? 5 things to know

Getty Images

​Ethical conflict of interest

5/6

​Ethical conflict of interest

Have you signed official documents agreeing not to hold investments in another company in the same sector as the one you are working in? Recall if you have made any such commitments. Whether this investment will have a conflict with the company you are employed in now is a common dilemma that occurs. Consider and consult before making this decision so that it doesn’t jeopardise your future.

Getty Images

​Impact on your taxability

6/6

​Impact on your taxability

The listing gains you make from the IPO must be reported in your income tax return (ITR). With PAN-Aadhaar linking, the regulator is likely monitoring your transactions and expecting to see these in your ITR. Make it a habit to reconcile what is being invested and what you have harvested as gains. Assess the impact this may have on your income tax that year with the help of a professional. Remember, ITR has 5 heads of income and you are assessed on total income including the income from capital gains. Your salary alone may leave you in a lower tax bracket but the bump from the IPO-induced capital gains may put you in a higher bracket.

Also read: How to invest in an IPO

Getty Images

Share This :