Let me share with you a story.
A few years ago I was in the lift with my wife. Joining me were two old uncles. One of them told his old pal that the market was recovering. Hence, he had decided to subscribe to Global Logistics Property (GLP) IPO. Another main reason - the backing of GIC (Government Investment Corporation Singapore).
His friend remained silent for a while then said: "Well, xxx, since you are going for it and I am your friend for more than 20 years, I will join you. What are friends for?" Maybe the uncles were retirees and flush with cash or CPF money.
This led me to think that:
(a) The IPO may be oversubscribed (true indeed!)
(b) This may be a good opportunity for IPO wannabes to go in and out fast
(c) There was so much awareness about this IPO that even uncles talked about it
(d) Without doing any due diligence and because it was a government-led IPO, the uncles subscribed
(e) Positive market sentiment was building up. You could hear people talking about the stock market everywhere
Question first
I thought it would be good to list some guidelines when looking at IPOs to know what you are buying and not just rush in like those uncles in the lift. Here are the 10 things you should ask yourself when reading the IPO prospectus:
1) Who is the issuer of shares? Who are the promoters and professionals involved?
2) What is the nature of the business, including the future growth and plans ahead?
3) Can you map out a brief competitive analysis and visualize the business strategy?
4) Does the company have any unique attributes, both internal/external? Perhaps robust management?
5) What is the track record and profitability of the company, including other quantitative indicators?
6) What are the risk factors involved?
7) How does the company plan to use the IPO proceeds? Are there any specific uses?
8) Do you have the analyst reports for benchmarking purposes?
9) Are there peer companies in similar industries or sectors you can compare this company with?
10) Are there institutional investors, substantial shareholders or directors' stake?
A word of caution
A word of caution - be careful buying into hot IPO stocks. If you do not know when to sell, you will be stuck when the counter goes below the IPO price. Worse, if you accumulate more post IPO there may be a chance you are just chasing the herd. Once the domino effect collapses and your technical timing is not right, you will lose money.
The truth is, if the company has value that may be overlooked or undiscovered at the current moment, why not consider buying and holding it for a longer term? There are always pros and cons. Think carefully. All the best in your IPO hunting!
By Ken Tan, who blogs at investment blog KT Wealth. Posted via www.MoneyMatters.sg, your guide on how to make more money, save smarter, invest intelligently, and enjoy your money like a pro. Click here to get our free report on what you must know about financial freedom.
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