When a company needs to raise funds from investors, it goes for an IPO. This is different from bank loans or debt, which is also a good way for companies to raise funds. The only difference is that you have to compulsorily repay the loan and interest, while there is no compulsion to repay anything in the case of IPOs. The market takes care of stock appreciation as a capital gain and in terms of dividend return. The question here is, senior citizens, who are usually risk-averse, should they invest in IPOs? The answer is yes, with strict caution and along with a few caveats. Let us see some of the important points that you must keep in mind.

All IPOs Do Not Make Money

While IPOs can potentially be rewarding, not all IPOs make money. Remember that the price appreciation of IPOs depends on the company’s business, the pricing of the IPO, and overall market sentiments. If the price is too high, there will be less demand for shares, and the price may even go down after listing. If the market sentiments are weak, shares get beaten even when the business is robust. Similarly, any problem in the company can impact the company’s business and hence the price of shares.

So, it is important to select the right companies’ IPOs for investment. To select the right IPO, look at some of the parameters such as its revenue and profit, CAGR in the last 5 years, PE ratio, growth commentary and risk mentioned by the management of the company.

Read About The Offer

Every company that has to go for IPO, has to publish offer documents, also known as red herring prospectus. The document details the purpose of the IPO, the business of the company, risk factors, and price & financials of the company. Reading the document can be tedious, but it is worth it.

Invest Only A Little Part Of Your Corpus

Do not invest all your money in IPO, and do not invest all your money in equities. The risk can be overwhelming in some cases when the markets come crashing down. So, to avoid possible financial problems, invest a little part of your money in an IPO. In such a case, even when the IPOs do not appreciate, you will not lose much.

Finally, while IPOs can potentially be rewarding, you should understand the risk and reward structure of them. The risk in an IPO is high because, after all, it is an equity instrument and also because the company is untested in the market. Equity prices are volatile in nature, and they can move either way. Despite you selecting a great IPO, there are always factors beyond the control of you and the company. So, do research, read the red herring prospectus, and invest only that much portion of your money, which you can afford to lose.

The author is an Independent Financial Journalist