There is significant money to be made in upcoming IPOs, as they provide investors with an opportunity to get in early on a company’s stock. However, blindly investing in an IPO without thorough research can be risky. The days of guaranteed first-day surges leading to massive returns are long gone, and investors must now focus on the long-term potential of newly public companies.

If you’re considering investing in upcoming IPOshere’s a structured approach to analysing them before making a decision.

How to participate in an IPO?

Before evaluating an IPO, you must first gain access to it. To invest in upcoming IPOs, investors need to: Identify companies preparing to go public by reviewing S-1 forms filed with the SEC (Securities and Exchange Commission).

• Register with a brokerage firm to receive notifications about new IPO offerings.
• Meet eligibility criteria set by brokerage firms, like maintaining a minimum required account balance or having a history of active trading.
• Once you are eligible to invest in upcoming IPOs, the next step is to analyse the company and assess whether it’s a sound investment.

Conduct thorough research

One of the biggest challenges with upcoming IPOs is the limited availability of independent research. Unlike established public companies, private firms going public do not have years of financial data or extensive analyst coverage.

• Start by examining the company’s financials, business model, and industry trends.
• Look for reports, press releases, and expert opinions to identify any hidden risks.
• Compare the company’s competitors to see how it positions itself within the market.

Many companies going public tend to overstate their potential. Be sceptical of overly optimistic revenue projections and ensure that the business has a sustainable path to profitability.

Assess the underwriter’s reputation

The underwriter of an IPO plays a crucial role in the process. A strong underwriter is often a sign that the company has been vetted thoroughly.

• Large and reputable investment banks, such as Goldman Sachs, tend to be selective about the companies they bring public.
• Smaller, lesser-known underwriters may be more willing to work with riskier companies.
• Boutique brokerages might offer easier access to IPO shares, but this can sometimes be a red flag if institutional investors are avoiding the stock.

If a top-tier underwriter is backing an IPO, it adds credibility to the offering, though it is still essential to perform independent due diligence.

Read the prospectus carefully

A company’s prospectus is a key document that outlines its financial health, business model, and risks. However, it is written by the company itself, so it should be read with a critical mindset.

Key areas to focus on:

• Use of funds: Is the company raising capital to expand, innovate, or pay off debts?
• Revenue sources: Does the company have a proven track record of generating income?
• Risk factors: Are there any legal, financial, or operational risks mentioned?

Be cautious if a significant portion of the funds raised is going towards paying off existing debt or compensating insiders, as this may indicate financial instability.

Be cautious of overhyped IPOs

Many upcoming IPOs generate buzz, leading to high initial demand. However, not all of them turn out to be profitable investments in the long run.

• Some IPOs experience a temporary price surge on the first trading day but struggle to maintain their value.
• Brokers may push certain IPOs aggressively when institutional investors have already declined to participate.
• Avoid making investment decisions based solely on hype—past IPOs saw massive first-day gains but later disappointed investors.

If an IPO seems too good to be true, it’s worth stepping back and evaluating its true potential before diving in.

Wait for the lock-up period to expire

The lock-up period is a specific timeframe, usually between three and 24 months, restricting company insiders and early investors from selling their shares.

• Once the lock-up period expires, insiders are allowed to sell, which can give you a better idea of how they view the company’s long-term prospects.
• If many insiders rush to sell their shares, it may indicate that they lack confidence in the company’s future growth.
• On the other hand, if they hold onto their shares, it could be a positive sign that they believe in the company’s long-term success.

Waiting for the lock-up period to end allows the market to settle and provides a clearer picture of the stock’s stability.

Make informed decisions before investing in upcoming IPOs

While upcoming IPOs can be exciting investment opportunities, they require careful evaluation. The key to making suitable investment decisions is conducting thorough research, assessing the underwriter’s reputation, scrutinising the prospectus, and avoiding overhyped stocks.

Waiting for the lock-up period to end can also provide insight into the company’s stability and long-term potential.

If approached with a sceptical mindset and disciplined strategy, investing in upcoming IPOs can lead to substantial rewards. However, those who rely solely on market hype may find themselves facing disappointing returns. Always do your due diligence before committing to an IPO investment.