Are you thinking about investing in an IPO (Initial Public Offering)? It is a great way of investing in the stock market, but this doesn’t mean that you invest in just any IPO. There are a number of IPOs that don’t succeed, which means it will be your money down the drain. So, there are certain things you need to look for before you invest in one. As Shay Benhamou says, the best place to start is reading the IPO prospectus, but understanding what parts are important can help you make an informed decision. So, what should you look for? Read on to find out:
– Understand the business
Every expert, including Shay Benhamou, will tell you that you should never invest in a business you don’t understand. If you cannot understand the business from the prospectus, it is a problem with them. They need to be clear about the product or service they are offering, the problem they will solve and the gap they will fill in the market. If you understand the business, you can identify the market opportunity. When it comes to shareholder returns and growth, the size of the opportunity and the ability of the company to get market share can make a big difference.
– Know the risks
There is a certain level of risk associated with investing in the stock market. According to Shay Benhamou, considering the broad range of companies across different industries, you have to understand the risks associated with every business prior to investing. The number of competitors, the existing market environment and the quality of the product or service are all relevant. You can check the prospectus to find company specifics and they should be considered before you make a decision.
– Check company management
It is recommended by Shay Benhamou to take a close look at the managers and directors mentioned on the prospectus. Check out their track record to ensure they have solid experience. Check how long they have been working with the company as well as their remuneration. Look how well rounded the board is. You should do your due diligence, which includes a Google search. If there is a lot of negative press, it is a red flag.
– Know the reason behind the listing and the use of funds
Companies usually go public because they want to raise funds from investors and they should clearly specify in the prospectus about how they will use them. Shay Benhamou says that knowing where the money is going should be important to you because it will affect the performance of your investment. Companies that invest the raised funds back into the business will obviously have a good incentive to see the business grow.
– Look at the financials and go over the evaluation
The long-term success of the business depends on sound financials. As per Shay Benhamou, this will indicate how the company is using its existing capital as well as its historical growth. The company’s valuation is also dependent on the financials. If the company turns out to be overvalued at the time of its IPO, then it may decline when it is listed, so it might be better to invest once the shares are trading. In order to determine if the company is valued fairly, you should check out similar listed companies and compare their growth potential, competitive advantage and company management.
– Know the lead broker
According to Shay Benhamou, quality brokers usually bring quality companies ‘public’. If a reputable broker is floating a company, then it is reassuring because it means that strong due diligence has been conducted on the company’s potential and prospects. This doesn’t guarantee success, but it does indicate that the broker believes the company has a good chance of succeeding.
As long as you look at these factors before investing in an IPO, Shay Benhamou believes you will be able to make the most of it.