Buying shares in an IPO can be a strong investment strategy if the company has solid fundamentals, a reasonable valuation, and clear growth prospects; but it requires careful research before committing funds.
When a company announces its plan to list on the Nigerian Exchange (NGX), it often draws significant attention from retail and institutional investors alike. For first-time investors exploring equity investment, an Initial Public Offering (IPO) can look like an attractive entry point into early-stage ownership of a growing company.
But how do you know if an IPO is actually a good investment? Understanding how to purchase shares, evaluating offer terms, and analysing market risks are crucial steps before allocating your capital.
Are IPOs Good Investments?
An IPO allows retail investors to buy shares in a company at a fixed offer price before it begins daily trading on the public stock market.
The Upside:
Ground-Floor Pricing:
Purchasing shares during an IPO gives you access to a company's equity before public market supply-and-demand dynamics take over, potentially locking in a lower entry price than what secondary market trading may offer.
Long-Term Wealth Accumulation:
If the company grows its revenues, expands market share, and pays consistent dividends, early investors can reap substantial long-term gains through equity appreciation.
The Reality: Not every IPO delivers immediate profits. Some stocks surge on their listing day, while others decline if market expectations are unmet. An IPO is an entry point into equity investing, not a guaranteed profit shortcut. The quality of the company, the fairness of the offer price, and your investment horizon all determine whether an IPO proves worthwhile.
What Investors Should Consider Before Buying Shares
Before committing funds to any public offer, evaluate these four fundamental factors:
Company Financial Performance:
Review the company's past three to five years of revenue, profit margins, and debt levels. Consistent profitability or a clear, credible path to profitability is a positive signal.
Use of Proceeds:
Is the company raising money to expand operations, build infrastructure, or invest in new markets? Or is a significant portion of the funds raised going toward settling existing commercial bank debt?
Competitive Position:
Does the company hold a strong or defensible market share in its industry relative to competitors in the Nigerian capital market?
Valuation:
Is the IPO share price fair and proportionate relative to the company's earnings and industry peers? An aggressively priced offer may correct downward once secondary market trading begins.
How to Evaluate an IPO Prospectus
The prospectus is the official document approved by the Securities and Exchange Commission (SEC), detailing everything about the offer: its terms, the company's financials, its leadership, and its risks. Every potential investor should read it before applying.
When reviewing an IPO prospectus, focus on these three key sections:
The Executive Summary and Business Model:
Explains how the company actually makes money, where it operates, and where future growth is expected to come from.
Risk Factors:
A mandatory section where the company discloses operational, regulatory, and market risks that could affect future earnings. Read this section carefully, it tells you what could go wrong.
Dividend Policy:
Outlines the company's commitment, if any, to sharing future profits with equity investors. Not all listed companies pay dividends, particularly in their early years of trading.
Understanding Risk and Return in Stock Investment
All stock market investments carry varying levels of risk alongside their potential returns:
Capital Growth:
As the company grows and performs well, market demand for its shares typically increases, driving up the share price over time.
Dividend Yields:
Some listed companies distribute a portion of annual net profits to shareholders in the form of dividends, providing a regular income stream alongside potential capital appreciation.
Market Volatility Risk:
Factors like inflation, currency fluctuations, interest rate changes, and shifts in investor sentiment can temporarily or materially lower share prices, even for fundamentally strong companies.
Liquidity Risk:
In newly listed stocks, trading volumes may be low in the weeks following listing, making it harder to exit a position quickly if needed.
Common Mistakes First-Time IPO Investors Make
Avoid these common errors when considering participation in a public offer:
Buying based on brand recognition alone:
Assuming a well-known consumer brand automatically translates into a profitable or fairly valued stock is one of the most common mistakes retail investors make.
Ignoring the debt profile:
Failing to check whether the company is using IPO proceeds primarily to settle outstanding debt rather than fund genuine growth is a significant oversight.
Investing funds needed for short-term expenses:
Allocating money needed within weeks or months into equity assets that require a long-term investment horizon to deliver returns.
Expecting immediate price gains:
Anticipating instant post-listing surges rather than holding shares for compound growth over a multi-year period is a mindset that leads to premature selling and missed returns.
What Happens After an IPO Closes?
Understanding the full lifecycle of an IPO helps investors know what to expect after submitting a subscription:
The subscription period closes and allotment is processed by the issuing house
Successful applicants receive shares credited to their Central Securities Clearing System (CSCS) account; the account through which all Nigerian capital market holdings are held and managed
Unallotted funds from oversubscribed offers are refunded to applicants' bank accounts within the timeframe stated in the prospectus
The stock is formally listed on the NGX and secondary market trading begins
The newly listed company must comply with NGX continuous disclosure obligations, including quarterly financial statements and material news announcements
Investors can monitor performance, track dividends, and manage their holdings through digital investment platforms
IPO Investing vs. Buying Shares After Listing
Price
Buying During an IPO: Fixed offer price set by issuing houses
Buying After Listing (Secondary Market): Fluctuates daily based on market trading
Share Availability
Buying During an IPO: Subject to allotment if oversubscribed
Buying After Listing (Secondary Market): Buy exact quantities during trading hours, subject to availability.
Financial History
Buying During an IPO: Relies primarily on prospectus financial records
Buying After Listing (Secondary Market): Access to quarterly public market reports and trading history
Execution
Buying During an IPO: Subscription during an open offer window
Buying After Listing (Secondary Market): Real-time execution via live order book
When Should You Avoid an IPO?
Consider skipping a public offer or waiting for secondary market trading if:
The prospectus reveals continuous operational losses without a credible, evidenced path to profitability
The offer price is materially higher than established peers in the same industry sector
The majority of funds raised are intended to settle existing debt rather than fund growth or operational expansion
You need access to your capital within weeks or months; equity investment requires a long-term horizon
The risk factors section of the prospectus discloses significant unresolved regulatory, legal, or operational uncertainties
How to Buy Shares in Nigeria Through i-invest
Participating in a public offer in Nigeria no longer requires visiting a physical brokerage office or completing paper application forms. Here is how to invest through the i-invest platform:
Download and register:
Install the i-invest app from the Google Play Store or Apple App Store. Complete your identity verification using your BVN and a valid means of identification. Once your registration is complete, your CSCS account will be automatically created and linked to your profile.
Fund your account:
Deposit funds securely via internet banking, bank transfer, or card payment.
Navigate to Equities or Public Offers:
Browse currently active IPOs, Rights Issues, or listed equities available on the NGX directly within the app.
Review the offer terms:
Check the offer price, minimum subscription quantities, allotment basis, and closing timeline before applying.
Submit your subscription
Enter the number of units you wish to purchase and confirm your transaction using your PIN. Allotted shares are credited to your CSCS account automatically after the allotment process is completed.
Track your investment:
Monitor your holdings, review performance, and manage your portfolio through the i-invest dashboard.
Frequently Asked Questions About IPOs and Shares in Nigeria
Should I buy shares in an IPO? Buying shares in an IPO can be a strong wealth-building strategy if the company has solid fundamentals, a reasonable valuation, and clear revenue prospects. Always read the SEC-approved prospectus carefully and consider consulting a licensed financial adviser before committing funds.
Is an IPO a good investment? An IPO can be a profitable long-term investment, but performance depends on company execution, the fairness of the initial pricing, and broader macroeconomic conditions. It is not inherently good or bad — the quality of the specific company and offer determines the outcome.
How do I buy shares in Nigeria? You can purchase shares in Nigeria by downloading a regulated investment platform like i-invest, completing registration, funding your account, and placing buy orders for listed equities or active public offers. You can also use any licensed stockbroker.
How can I purchase shares online? Download the i-invest mobile application on Android or iOS, complete account registration, navigate to the Equities section, select your target stock or active IPO, enter your desired purchase amount, and confirm your transaction.
What should I look for before buying shares? Evaluate the company's revenue history, profit trajectory, competitive advantage, management background, existing debt levels, use of IPO proceeds, and dividend policy. Read the risk factors section of the prospectus in full.
What is a CSCS account and do I need one? A CSCS (Central Securities Clearing System) account is the account through which all shares purchased on the Nigerian capital market are held and managed. It is mandatory for participating in any public offer in Nigeria. When you register on i-invest, your CSCS account is set up as part of the onboarding process.
What happens if I am not allotted shares in an oversubscribed IPO? If the offer is oversubscribed and you do not receive a full or partial allotment, unallotted funds are refunded to your bank account within the timeframe specified in the prospectus.
What is the difference between an IPO and buying shares on the secondary market? An IPO is a primary market transaction — you are buying shares directly from the company during its first public offer at a fixed price. Secondary market trading happens after the company has listed, where you buy shares from other investors at a price determined by live market supply and demand.
Disclaimer: This article is provided strictly for educational purposes and does not constitute financial or investment advice. Equities are subject to market risks and volatility. Investors should review official SEC-approved offer prospectuses and consult a licensed financial adviser before making any investment decision.
