IPO play: Look out for these blind spots

If a public offer is oversubscribed, it's a must buy, right? But there is every probability that you may be wide of the mark. The thumbrule doesn't hold true all the time. Like this, there are many popular notions about an initial public offering that could shortchange you. That's precisely why we decided to separate the wheat from the chaff and present a list of myths and facts if you are thinking of investing in IPOs.

Also known as initial public offer, IPO is a frequently used tool by which companies raise funds from the market. It's a way of listing a stock too.

Myth 1: Shares are up for grabs early and cheap. Listing can lead to great gains. Fact: No one size fits all. It may be true in a few cases. Mostly, individual investors find themselves at the end of the queue. The first owners of these shares usually are angel investors, venture capitalists and private equity firms.

Myth 2: Companies going public flourish and have grown financially. Fact: Here too, no sweeping rule. There are instances where companies go public at a very early stage in their life cycle before proving their financial feasibility. The differentiator is debt. One needs to figure out if the IPO money is to finance a company's expansion plans or lighten its debt load. The latter is avoidable unless you are convinced about the business model and its business metrics.

Myth 3: Issue price is fair value and one cannot lose money by investing at that point. Fact: This is far from true. Fair value of a company is linked to various financial parameters and the macro environment. There are cases where market fundamentals don't play ball and good companies have fallen below their issue price on the listing day.

Myth 4: Oversubscription means the issue is a must buy. Fact: Oversubscription does not always guarantee solid performance. Initial readings on demand can be misleading and you may burn your fingers. Any such news flash is only a pointer that the IPO fits into the investment scheme of things. But take the plunge only if a due diligence is done and you are pretty sure it's a good buy. Better take care.