Trend has accelerated as some offerings have given   100% returns within days of listing.

Spectacular returns by the recent initial public offerings   (IPOs) on listing day are prompting a growing number   of retail investors and even high net worth investors   (HNIs) to borrow funds at a costly 16 to 17 per cent   (for two or three weeks) to bid for IPO shares.

“Several brokerage houses have back-to-back  arrangements with banks for IPO financing.The  oversubscription of recent IPOs shows that liquidity   conditions are very good,” said Rajnish Rangare,  Head-Capital Markets, Karvy.

The trend has accelerated because some recent IPOs have  offered more than 100 per cent returns within days of listing.

For instance, Motilal Oswal Financial is trading at Rs 1,716, up 108 per cent from the issue price of Rs 825 since its listing in mid-September. Maytas Infra trades at Rs 899, up 142 per cent from the issue price of Rs 370 since its listing on October 25.

The prospect of such handsome returns has resulted in recent IPOs being subscribed many times over.

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There are a plethora of IPO and while they give good    opportunities to make money they can also be dangerous if   one doesn’t exercise caution in the choice of IPOs that one   invests in.

While conventional wisdom has it that stocks should be   bought into only with the intention of holding on to them
for the long term and money can only be made if one waits
on their investment for at least an year or so. While this is
true and investors as far as possible should stick to this maxim IPOs are generally priced at a discount to their intrinsic value and can present opportunities of what is known as Listing Gains.

Here are a couple of tips that should hold you in good stead while investing in any IPO.

When you invest in an IPO you block a big amount of your cash for about a month or so. Invariably the number of shares that are allotted to you are not even half of what you have applied for. This is a very critical thing, because very often it can happen that if the shares are oversubscribed 6 or 7 times and you are investing only around Rs.25000 or Rs.30000 you might end up not even getting a single share. In such situations not only do you lose interest for that period but more important than that you lose opportunities to invest in other IPOs that might have been open in that period.

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The initial public offering is a part of the market that always generates a great deal of interest, along with stories of fabulous profits and spectacular losses. But there are a ways to reliably profit on the initial public offering. Look for the trends that the initial public offering may cause and trade with them.

Initial public offering spinoffs are a solid trading trend to work with. A company that’s going to spin off a part of itself as an initial public offering tends to move steadily up in price until the initial public offering date, starting a week or two before that date. On the day the initial public offering starts to trade, the parent company’s stock typically dips sharply. The best strategy is to buy the parent once it starts moving in anticipation of the spinoff, sell it the day before the initial public offering is to begin trading, and then short the parent just after the initial public offering starts to trade.

Another trend to consider is the “quiet period” trend. The “quiet period” for the initial public offering is the twenty five days after a company goes public. During this time, the SEC forbids the company and the initial public offering underwriters to say anything that isn’t covered in the company’s prospectus or final registration statement. The underwriters face further restrictions on issuing any research.

As stocks near the ends of their quiet periods, they tend to steadily rise in price in anticipation of the “strong buy” recommendations most will receive from their underwriters after the quiet period ends. The run-up usually begins about ten days prior to the quiet period expiration, and is often accompanied by steadily increasing volume. It’s wise to sell quiet period stocks the day before the recommendations come out. Why not hold the stock after it gets a “strong buy” recommendation? It’s another case of buy the rumour, sell the news. It’s also best to trade this trend with stocks that have highly respected underwriters and are in hot sectors.

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The decision to take your company public is far from being only numbers based. A number of critical questions can help you determine if you have the numbers and the infrastructure in place to conduct an initial public offering.

By the time that Unica co-founder and CEO Yuchun Lee began to think about an initial public offering (IPO), his enterprise marketing management software company was already a success story. Founded in 1992, the firm had raised $11.2 million in private equity, using the money to hire experienced managers, speed up product expansion and extend its sales reach. Unica’s revenue grew twelve-fold in the six years leading up to its August 2005 IPO, and the company had been named as one of Inc. magazine’s fastest-growing companies for four consecutive years.

After all this success, how did Yuchun know that it was finally time to take his company public? In Yuchun’s words, the choice reflected a combination of intuition and logic.

“It seems like there are ‘left brain’ and ‘right brain’ components to this decision,” he explains. “The ‘left brain’ portion is straightforward. The financial market has a fairly clear set of parameters around which companies are qualified to go public from a metrics standpoint: revenue level, revenue growth rate, operating income, EPS, market potential, market position, management team completeness, and so on. Depending on the type of investment bankers one is looking for, these metrics may differ, but by and large they are determined for a given market condition.”

The decision, however, was far from entirely numbers-based.

“The more subtle part of this decision is the ‘right brain’ portion,” Yuchun says. “That is a judgment about a level of confidence, from internal operation readiness to market momentum.”

The time was right for Unica in August 2005, and though the market’s demand for IPOs may have slackened lately (venture IPOs raised 45% less in the third quarter of 2005 than the year previously), quality companies are still receiving financing. If you are one of those entrepreneurs wondering whether now is the right time to take the step, you should ask yourself a number of critical questions:

* Does your company have predictable revenue and earnings?
Newly public companies that miss their numbers are often harshly punished, not just with lower stock prices but with shareholder lawsuits. If you’re not ready to forecast results accurately, you’re not ready for the public markets.
* Is your company big enough?
Companies with market caps under $200 million may be too small for an IPO. Most initial public offerings need to be able to raise at least $75 to $100 million through stock sales and shareholder selling.

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Are Initial Public Offerings Appropriate for Regular Investors?

Investors are people. They like novelty; get excited by something new, especially if it holds the promise of making them a whole lot richer and provides bragging rights at their next cocktail party. Maybe that’s why amateur and professionals alike tend to lose their minds in bull markets, particularly when a hot initial public offering, or IPO, is offered to them by their broker.

On one hand, had you bought into the initial public offering of Wal-Mart, Home Depot, Walt Disney, Dell, Microsoft, Coca-Cola, Target, or Starbucks, you may have had some volatile price fluctuations along the way, but there is no question that you have made enough money to substantially change the quality of your life.

A single share of Coca-Cola purchased for $40 at the IPO in 1919, for example, crashed to $19 the following year. Yet, today, that one share, with dividends reinvested, is worth over $5 million. Likewise, $10,000 invested in Wal-Mart is now worth $10 million plus. Clearly, a well chosen IPO investment can be a life changing experience if you simply make the right choice and stick the stock certificates in your safety deposit box for thirty years. On the other hand are companies such as WebVan, the bankrupt web grocer that left investors with total losses, licking their wounds and draining their portfolio of precious capital that could have compounded into huge nest eggs if given enough time.

Leaving us with the question: Should you consider investing in IPOs?

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