April 11, 2024
This article explains how to trade IPOs or Initial public offerings in stock market in a structured manner.

IPO- How to spot the winners and make a Killer Profit? (A Step by Step Guide with current trends)

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Initial Public Offerings, or IPOs, can be a great opportunity for investors to make a profit. But with the high risk and volatility that comes with investing in a newly public company, it’s important to know how to spot winners and make a killer profit.

In this blog post, we’ll take a deep dive into the world of IPOs, discussing key metrics to look for, the importance of analyzing the company, and tips for maximizing your returns. 

I will also share my thoughts on how to track these IPO, when to look into them aggressively and how to trade them with proper risk management. Whether you’re a seasoned investor or new to the game, this guide will provide you with the knowledge you need to make informed decisions when it comes to trading in IPOs.

Why IPOs?

You take any multi-bagger stock, it was first offered as an IPO only. Whether it is TCS, Wipro, Apple or any other stock, it was an IPO once. When an IPO is offered the company is less known to the public. Even institutions like mutual fund houses won’t be interested to buy them as they have restrictions to invest in them. Liquidity issues, safety concerns, doubt about the prospective future of the company all will make one feel that buying an IPO to be more speculative than an intelligent decision.

However, an IPO offers us a great chance to be a part of a great company in the future right from the start. You would have often seen in social media how a 10,000 invested in Infosys would have grown into millions. But, how many of us would have invested in Infosys when it was launched? We would have been happily invested in TCS rather than Infosys. Right? IPOs can be a fantastic opportunity to find the next Infosys, next reliance, next Asian Paints, if one has a proper way to trade and invest in them. These are growth stocks which have the potential to grow into 10X, 20X or even 200 X.

Never Rush to buy an IPO:

Having said that, will it be wise to apply for every IPO that is being issued? Every year more than 100 IPOs are being issued. In 2022 alone, 134 IPOs were issued. With such a huge number, only a handful of stocks succeed. So, whenever an IPO is listed don’t be in a hurry to apply for them. Most of the retailers apply for IPO based on news that is being built before the issue date. The narrative is set in such a way, that once in a lifetime opportunity has come and one should never miss it. Never ever fall for this, never rush to buy an IPO. 

You may think that the company is really good,  you may be using their products on a day to day basis.

You may also be tempted to apply for that IPO. But, don’t rush. The two recent famous examples of IPO failures are: Zomato and PayTM. Who would have thought that Zomato and PayTM would fall more than 75% from the listing price? 

Paytm IPO failure is shown in the picture

The above chart of Paytm tells how sad and frustrating it would be for a common retailer to have lost his money in this. Of course it may come up and may reach an All time high again. But when? How long? Will the retailer have that much conviction and patience to sit over? Most of us won’t.

So, make it as a number one rule – Never apply for an IPO for its listing gains, Never fall into the trap of FOMO – ” Fear of missing out”.

Look into recent IPOs:

By recent IPOs I mean the IPOs that were listed at least a year back. Two years back will be much better.

When you look into an IPO that is trading for at least two years, you have a good enough data to believe in the story of the company. 

Now, you can look into the earnings of the company, growth rate of it, you can see the chart of that company, buyer’s interest, you can check how the stock performed during poor times of broader market, you can check the relative strength of the stock with respect to broader market. You can read their annual reports which will be easily available for anyone.

See the Quarterly Reports of ZOMATO in the picture below:

Source: Screener.in

This image represents how important it is to check the balance sheets of IPOs. This image tells the failure of IPO Zomato

In the last ten Quarters, the sales growth is exceptional. Growing year on year. But, see the Operating Profit margin (Red Rectangle). It has not even once registered a positive OPM%. The chart of Zomato reflects the same. No wonder, it has fallen 75% or more. If you had waited, at least for a year before jumping to apply for this IPO, you would have saved a pretty good amount. 

That’s why, one should look into only those IPO’s that have been trading for at least a year or more.

Where to look for IPO’s?

There are a lot of good websites which have details of upcoming IPOs and also historic IPOs. You can check Money-control,  Chittorgarh etc., for historical and also upcoming IPOs.

However, I found Trendlyne.com to be more easy and user friendly to check the IPOs based on year.

In that website it is easy to filter the IPOs based on the year. For example, if I want to see the IPOs that were listed in 2019, I can see them. 

You can select top 10-20 IPOs based on returns and look into them. 

See the image below:

This image shows how to screen IPOs listed year by year using Trendlyne website

Avoid stocks with Shady Chart Patterns:

Look at the chart of the stock you want to trade. See how the chart is being printed day by day. Weekly and daily charts will tell you a lot about the stock. A good stock will show you a healthy price action. You can see patterns getting formed frequently, normal healthy pullbacks, good volume, price volume coordination etc,. 

Avoid stocks that show frequent upper circuits, lack of trading activities, suspicious one way move etc,.

See the example of Ascom Leasing below:

The stock has given a return of 682% from the time of listing. But see how unhealthy the price action is. Now see the daily price action of the company below:

Unhealthy chart pattern of IPOs is shown in the picture

Give time for the IPO to settle – Don’t Chase:

Some IPOs, if they are very attractive with good management and good prospects, will keep on rising in price from the moment they got listed. When such a thing happens you will hear news and articles about that company like “ The multi-bagger in making”  “ This auto stock has beaten all the odds”, “This XYZ stock has grown 3x in just three months” and so on.

But wait. Don’t jump right away. Catching a running stock is like trying to board a running bullet train. Even a small mistake may cost you a lot. Any stock, how good it is will cool down. Look for that pullback in high time frames. Higher time frames have their own advantages to filter noise. Weekly or monthly pullbacks will add much value and wait whether the stock can surpass that pullback. 

Now is the time to enter. The stock has proved its mettle and the hoopla around the stock during the time of its listing may be true. So, always wait for the stock to cool down.

Wait for a pattern to develop: 

Next thing to do once the Stock cools down is to look for a pattern to develop. The pattern can be anything you like. It may be a cup and handle pattern, High tight flag pattern, Flag pattern, trendline breakout etc,. My favorite is to look for cup and handle patterns along with the stock reaching an All time High.

This is a very bullish pattern and this is the way Mark Minervini uses to select stocks and shortlist his watchlist.

Let me show you an example of this:

Prince Pipes Fittings LTD,.

Image shows how to trade new IPOs using technical analysis

As you can see in the above chart, after the IPO was listed the stock went down for months. Later, it gradually started going up and formed a good cup and Handle pattern and it broke into the All time high zone. 

This is when a trader or an investor should become interested. 

How much to Invest?

Don’t invest too much in IPO’s. Once your account size becomes large enough you should be putting your major portion of bets in established stable stocks. I don’t prefer investing more than 10% – 20% of my trading capital in an IPO. You can start small and start building positions in it gradually as the stock continues to show strength. 

Position sizing is the most important aspect of trading. You can try my free position sizing calculator if you want to know how much shares you can buy with minimal risk. 

When to exit?

IPOs are bought in an expectation to win that much loved multi-baggers. Unfortunately, multi-baggers won’t happen overnight. It takes years of price action put together to make a multi-bagger. Once you have entered an IPO you should trail your stop loss, preferably on a higher time frame, say weekly / monthly.

Have a proper exit strategy, so that you don’t exit soon and miss out the rally and not give back too much of profits back to the market. Also, keep track of the earnings report that comes out every quarter. Some investors say that they look for exciting news associated with the company. But, I am very bad at differentiating between which is exciting and which is not. So, I like myself to be attached to the chart and I will let my chart tell me when to wind up.

Key Takeaways:

IPOs are a good opportunity to participate in a multi-bagger rally.

Never apply to the new IPOs, always wait for the stock to perform at least an year before you show any interest.

IPOs are growth stocks, so keep an eye on how the stock is growing year on year.

Hold the stock for a long term, till the time your exit criteria is met. Don’t exit just because you got some profit. You will miss a major part of the rally.

Know how to position size and how much to allocate in the IPO. Many neglect position sizing and risk management. Don’t be one.

Track all your trades to know how your strategies are performing, by keeping a Trading Journal.

All the stock names given are for study purpose only. Kindly do your own research before investing. I am not a SEBI registered analyst. 

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