For those planning to make long-term gains, investing in an Initial Public Offering (IPO) can prove to be a beneficial way. 

Investing in an IPO has become a growing trend in the market and some of them have proved very profitable to the investors, giving them as much as 90 per cent returns.

However, not all IPOs are worth investing and one should tread this path of investment carefully to avoid any major loss. So how can one decide if an IPO is worth subscribing with their hard-earned money or not? Let's first understand what is an IPO of a company. 

What is an IPO?

IPO is an initial public offering in which the private company's shares are made available to the public for the first time. 

This helps the company to increase its equity capital with the help of public investors and go from a privately held corporation to a public corporation. 

Investors can profit from an IPO if the issue price of IPO shares is less compared to the listed price when it is sold in the market.

The company raises its IPO to gain funds for equity capital, ensuring hassle-free trading of future capital and monetising private equity investors' investments.

Five things to know before investing in an IPO

Investigate the company’s financial condition history

It is important to check the financial condition of the company and the history of its performance, before investing in an IPO. One can look into how the company has performed in the last few years and if it is in a profitable zone. 

Understand the valuation of the IPO

An IPO's valuation is dependent on the price at which shares are issued by the company before stepping into the market.

It is important to analyse the valuation and if the IPO appears overvalued, one should avoid investing in it. One way of understanding if an IPO is fairly valued is by conducting a comparison between the prices of shares of similar companies and the issue price of the IPO. 

Find out why the company is raising funds

There can be various reasons why a company is going public and raising funds. Not every time, does the company raise its IPO because it is going for a growth plan or launching a new product.

Carefully check the lock-up period of the IPO

It is important to check what is the lock-up period of an IPO, which generally ranges between three to 24 months.

A lock-up period refers to the time when the investors are prohibited from selling any shares of the company.

This is important because an IPO may be listed at a higher price when it debuts in the market, however, there can be a slump in the price after the lock-up period which will impact the profit of the investors.

Study market conditions

One must also look at the current market conditions when subscribing to an IPO. When markets are bullish, it is likely that the IPOs will open in green, but they can go red if the market turns bearish.