Before You Buy That IPO

The IPO craze is back, and it’s easy to get caught up in the excitement. We’ve seen this movie before: a stampede of investors eager to get a piece of the action, often without understanding the risks. This time, let’s approach IPOs with knowledge and caution.

Investing in an initial public offering (IPO) can be exciting, but it’s important to proceed with caution.

Below are ten key points to consider before investing:

Know the Business: Understand how the company makes money. What are the main sources of revenue? A solid understanding of the business model is crucial to assessing potential. Are they really making money or are they operating on loans? These are questions to ask. Know the Business: What are their main sources of revenue?
If possible, review the company’s finances: Dig into the company’s financial statements – balance sheets, income statements, and cash flow statements. Look at profitability, revenue growth, and financial health indicators like debt levels and liquidity ratios.
Industry Check-Up: Analyze the industry the company is in. Is it growing? What are the market trends? For example, if it is a bank, compare it to other banks. The same goes for companies in fast-moving consumer goods (FMCG) and others. Compare apples to apples.
Valuation Issues: Determine whether the IPO price is consistent with the company’s earnings, growth prospects, and industry peers. An overpriced IPO can lead to significant losses when the market corrects itself.
Read the fine print (the prospectus): The prospectus is your road map. It provides crucial information about the company’s operations, finances and risks. The first place to read is the “Risk Factors” section. Pay close attention to it, as it will highlight potential challenges that could affect the company.
Lock-Up Period: Understand the lock-up period. This is when insiders cannot sell their shares. Once the lock-up period is over, a flood of shares can enter the market, potentially lowering the price.
Regulations: Make sure you are familiar with the regulations of the Nigerian Exchange Group (NGX) and how they may affect the company you wish to invest in.
Management Matters: Assess the leadership team’s experience and track record. Experienced and capable leadership can make a big difference in whether a company can overcome challenges and capitalize on opportunities.

Institutional Investors: Institutional investors are large financial organizations such as pension funds, mutual funds, insurance companies, and foundations that invest significant amounts of money. When these large players show interest in an IPO by purchasing a significant number of shares, it is often seen as a positive signal. They are seen as having “deep pockets.” They have the resources to perform extensive due diligence, hiring teams of analysts to examine a company’s finances, management, and market prospects. However, always do your own research.
Market buzz and media hype: Be careful with excessive media hype. Make decisions based on thorough analysis, not just headlines.

Investing in an IPO can be rewarding, but it is essential to approach it with knowledge and caution. Diversify your investments and consult a financial advisor to align your goals with your investment strategy. For more financial tips and resources on wealth creation, financial planning, and different investment options, I have created free instructional videos for you, which you can feel free to watch on our channel – “women wealth and wills tv”. Remember, an informed decision is the key to financial success.

I wish you a peaceful weekend and lots of fun investing!

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