With low-interest rates and savings boosted by no commuting costs over the last year, many younger, less experienced investors are investing their pandemic savings in shares. Evgeniy Tyapkin, Executive Director of Freedom Finance Europe, offers the following informed, simple and educational IPO investment tips for this emerging cohort.
Research the IPO features
“We have been analysing IPO’s since 2012, and, based on this experience, we recommend you consider the following factors when choosing an IPO to trade,” explains Evgenii Tiapkin, Executive Director of Freedom Finance Europe.
“First, you should look at the IPO features. What is its purpose?
“The best thing would be business development or debt repayment. The IPO size should not be too large, while having large shareholders with a proven track record is a good thing, especially when most shares will be still owned by such shareholders after the IPO. Finally, first-tier underwriters with a good IPO yield track record are also important.”
Consider the key industry, business and finance factors
Once you have a good understanding of the purpose of the IPO, Tiapkin then advises that you pay close attention to the key industry, business, and finance factors, which include the following:
- IPOs of companies focusing on growing sectors, such as technology or biotech, or the companies changing their business model and increasing their market share through innovation
- Companies operating in large markets that have still some room for further growth and development
- Increase in the customer base (both in terms of numbers and quality) and an ability to retain it
- Diversified customer base with large-scale customers
- Product life cycles being at the initial or developing stages
- Large earnings growth (around 20% per year)
- When a company is suffering losses, there should be clear evidence that the negative operating margin is contracting, and the costs are cut so that the company may break even within a few years after the IPO
- Low or no debt burden with hybrid venture financing
- An understandable strategy of achieving positive cash flow in the next 10 years, with a clear information of the funding sources
- Experienced and renowned management, and a reputable founding team
- A clear post-IPO development strategy, with an expectation of good results in the first post-IPO quarterly report
- Members of the board, which are known in the industry
- Strong competitive and market position, ideally, with a competitive edge, such as patents, proprietary algorithms, or a unique business model
Diversification is crucial
Many IPOs have high yields, and yet, when you decide to trade an IPO, you should stick to your diversification strategy and invest only a fraction of your capital, as large potential yield in any IPO also means larger risks. By diversifying your risks, you will be saving your account balance, as well as getting overall profit in the stock market.