Considering IPO Stocks? Understand These Factors Before Investing
As of the end of August 2024, the Indonesia Stock Exchange (IDX) has recorded seven companies officially listing their shares on the Exchange, with total funds raised reaching Rp2.16 trillion, leaving seven companies currently in the IPO pipeline.
Indonesia’s capital market remains a viable alternative for corporate funding while providing more investment options for the public. Listyorini Dian Pratiwi, Head of the Corporate Development Division at the IDX, noted that the increasing number and scale of companies conducting IPOs indicates that the Indonesian capital market remains an attractive funding choice for the business world.
She added that the growing number of listed companies provides more investment alternatives for the public as a means of portfolio diversification. An IPO is the process where a company offers its shares to the public for the first and only time. Once the public offering process is complete, the company’s shares are listed and can be traded on the IDX. For companies, an IPO serves as an alternative to obtain funding for business expansion and the enhancement of good corporate governance. For investors, an IPO provides the opportunity to own a stake in a company that has newly become public.
Increasing IPO activity has also captured investor attention. Whenever a company lists on the IDX, market enthusiasm typically rises, with many stocks seeing price increases on their first day of trading. This condition often leads to the assumption that investing in IPO stocks is always profitable.
However, price increases during early trading do not necessarily reflect the company’s fundamentals or guarantee long-term stock performance. Once listed on the Exchange, share prices move according to supply and demand mechanisms and are influenced by various factors, including company performance, industry conditions, the economy, and market sentiment. Therefore, investment decisions should not be based solely on market euphoria, but through thorough analysis to ensure alignment with each investor’s investment objectives and risk profile.
Listyorini also believes that an IPO should not be viewed merely as a momentum for the first day of trading or the end of a company’s journey. She maintains that an IPO is the starting point for a company’s growth in the Indonesian capital market. Following an IPO, companies are expected to undertake further corporate actions in subsequent years, grow alongside the Indonesian capital market, and utilise the capital market as a ‘house of growth’ to support sustainable business development.
So, what should be considered before buying IPO stocks?
- Study the company’s prospectus
Listyorinc suggests that the first step is to study the company’s prospectus. This document is the primary source of information containing the company profile, business sector, financial condition, business strategy, use of IPO proceeds, and potential risks. By understanding this information, investors can gain a more complete picture of the company’s quality and future business prospects. Investors also need to scrutinise how the IPO proceeds will be used, whether for business expansion, capital expenditure, debt repayment, or other needs. In addition to understanding the use of funds stated in the prospectus, post-listing, investors must continue to monitor the realisation of these funds through the Report on the Realisation of Use of Funds (LRPD), as regulated under OJK Regulation No. 40 of 2025 regarding the Use of Proceeds from Public Offerings.
- Understand the company’s business model
In addition to reading the prospectus, investors need to understand how the company operates and generates revenue. Key elements to observe include target markets, revenue sources, competitive advantages, and the company’s strategy for business development. Equally important is assessing the prospects of the industry in which the company operates. Companies with clear business models in industries with growth opportunities may have room to expand, though risks and uncertainties must still be considered.
Scrutinise stock valuation and business prospects, not just the share price he price offered in an IPO cannot be the sole basis for determining whether a stock is cheap or expensive. Investors need to view the price in the context of the company’s value and fundamentals. One approach is to compare the company’s valuation with other listed companies in the same sector or with similar characteristics. Investors can consider ratios such as the Price to Earnings Ratio (PER) or Price to Book Value (PBV), while keeping the specific characteristics and business prospects of each company in mind. According to Listyorini, the primary goal in evaluating IPO stocks is not merely finding cheap shares, but ensuring that the offered price is proportionate to the company’s fundamentals and future growth potential.
Recognise various investment risks
IPO stocks still carry investment risks. As companies newly entering the capital market, the performance of listed companies can be influenced by various factors, both internal and external (economic and industry conditions). Furthermore, share prices after listing on the Exchange can be volatile, following market supply and demand mechanisms. Therefore, investors must maintain realistic expectations and avoid making decisions based solely on short-term price movements. Rather than focusing on the euphoria when stocks begin trading, investors can manage…