IPO Reading Guide: How to Know if an IPO Is Worth Applying For

INTRODUCTION

When a company goes public and offers its shares to the public for the first time — that’s an IPO (Initial Public Offering).
For many investors, IPOs look like a chance to make quick money through listing gains.
But not every IPO turns into a winner. Some shine, others disappoint.
So, before applying, you must read and understand the IPO details smartly.

Here’s a simple step-by-step guide to help you know whether an IPO is really worth applying for.

1. Understand the Business Model

Start with the basics — what does the company actually do?

Ask yourself:

• Is the business easy to understand or too complex?

• Does it solve a real-world problem or just follow a trend?

• Is there growth potential in its industry?

Tip: Check the “About the Company” section in the RHP (Red Herring Prospectus) — this tells you what the company sells, its market reach, and how it plans to grow.

2. Study the Financial Health

A strong business should show steady and consistent financial growth.
When you read the IPO documents, focus on:

• Revenue trend: Is the income growing every year?

• Profit growth: Are profits stable or declining?

• Debt levels: A company with very high debt is riskier.

• Cash flow: Positive cash flow = strong operations.

Avoid IPOs with fluctuating profits or growing losses. These companies may not sustain long-term.

3. Check Valuation & Pricing

Every IPO comes with a price band (a range of share prices).
To know if it’s worth it:

• Compare the company’s P/E ratio (Price to Earnings) with similar listed peers.

• Check how much ownership the promoters are selling.

• If the IPO is mostly Offer for Sale (OFS), it means promoters are selling their shares to take profit — not raising money for growth.

Healthy IPO: Balanced valuation + reasonable price range
Risky IPO: Overpriced shares with unclear future growth

4. Purpose of Raising Money

Look at why the company is going public.
The reason tells you a lot about its intentions.

• Good signs: Expanding business, repaying debt, new product lines

• Bad signs: “General corporate purposes” or unclear fund usage

Check the “Objects of the Offer” section — it explains exactly where the IPO funds will go.

5. Promoter & Management Quality

Behind every good company is a good leadership team.
Look at:

• Promoter background and experience

• Their track record in running the business

• Any history of fraud or legal trouble

• Their post-IPO holding — more stake means stronger confidence

If promoters are keeping a large ownership, it shows they believe in their company’s future.

6. Market Sentiment & GMP (Grey Market Premium)

The Grey Market Premium (GMP) shows how much investors are willing to pay for IPO shares before official listing.
It’s not official but gives an idea of market demand.

• Rising GMP = strong interest

• Falling or negative GMP = weak sentiment

Don’t rely only on GMP — it can change daily. Always check fundamentals too.

If most boxes tick the Apply side — it’s likely a good IPO to consider.

Example (Simplified):

If a company like “TechNova Ltd” shows:

• Consistent profits for 3 years,

• Plans to use IPO money for new branches,

• Promoters keeping 70% stake,

• Fair pricing compared to peers,

That’s a green signal. But if it’s loss-making, highly valued, and promoters selling large portions — it’s a red flag.

Final Thought:

Don’t apply for every trending IPO. Apply for those that show strong financials, real growth plans, and trustworthy promoters.

An IPO should fit your investment goal — not your FOMO. In short: Research first, invest second.