The Motley Fool

5 important tips for IPO investing

Looking at my shares today I noticed my online broker Selfwealth Ltd (ASX: SWF) is planning an IPO (initial public offering) in November, which got me thinking about IPOs in general.

The ASX has had some stellar IPOs this year with Bubs Australia Ltd (ASX: BUB) up 690%, Alderan Resources Ltd (ASX: AL8) up 860% and Wattle Health Australia Ltd (ASX: WHA) up 700% as the top three performers.

So I have compiled 5 important tips for IPO investing.

Do you understand the company?

This is true for any investment and with an IPO there is less information to look at than established companies, so you need to read the IPO prospectus, which is not the easiest document to read but necessary. You should be able to explain to anyone easily what the company does and how it makes money.

Management

Management are a good indicator of how a company will perform. Smaller IPOs especially rely on a few key people to steer the company. Check what they have done in the past and if they have the required skill sets to make the company successful, as opposed to relying too heavily on a founder.

Ownership

How much do the CEO and management have invested in the company? The more their financial interests are aligned with the company’s performance the better.

Also look at the pay structures. Do management have long-term pay incentives or options based on performance metrics and are their shares held in escrow? Meaning they cannot sell them on market for a period of time.

Follow the money?

Is the company raising new equity capital to finance future growth? Or is the money going to existing shareholders who are selling out? IPOs where the money goes to the company to finance growth and expansion are better future investments than IPOs where the money goes to the existing shareholders who are selling out of the business.

Don’t buy into promotional companies

Promotional companies are formed to develop new products, exploit new technology markets, or discover minerals or some other kind of natural resource.

These companies can offer great rewards, but they are also hard to value.

Investors sometimes feel there is a need to get in on the ground floor, but there are always opportunities in share markets and you could spend your time looking at established companies that have all the major functions operating; such as sales, production, management teamwork, and the other aspects of the company to make an informed decision.

Foolish takeaway

The same rules of investing apply to IPOs, with a few extra things to look out for. The main one being to do the required amount of reaserch and don’t rush in.

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Motley Fool contributor Christopher Coe does not own any shares mentioned above. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.