If you follow current market news, it’s hard to avoid the hype around upcoming initial public offerings (IPOs).

It’s natural to want a piece of the action. However, IPOs feature different types of companies – those that are very young or entirely private face distinct challenges compared to state-run behemoths that are shedding a sliver of ownership.

While it may be worthwhile to take an early bet on a newly-listed company, it’s important to conduct enough due diligence beforehand.

Here are six to-do’s before taking the plunge and investing in an IPO:

1. Understand the company and industry

A good place to start is the draft red herring prospectus (DRHP) filed with SEBI. Private companies about to list may be secretive. In that case news coverage is useful, especially in understanding the company’s leadership, management and promoters.

It also helps to understand the broader industry and competition. Why is the company listing at this point? Does the firm belong to a notoriously volatile sector? Is the business model sustainable and scalable? Is it genuinely creating long-term value in the market?

Here’s general rule of thumb that can save you a lot of grief: if you don’t understand the business, don’t invest in it.

2. Learn how equity markets work

Investing in individual equities carries a certain amount of risk, which is magnified if you choose to subscribe to an IPO.

If you’re a first-time equity investor who has limited experience buying and selling shares directly or through a broker, make sure you understand how to assess share performance over the short- and long-term and are generally comfortable with how equity markets work.

3. Consider the alternatives

Mutual funds have become a tried and tested vehicle for Indians to grow wealth without dedicating so much time and research to individual companies. There are a multitude of funds to invest in, managed by professionals and catering to different risk profiles. You can even balance your desire for equity exposure with other asset classes.

Index funds and exchange-traded funds (ETFs) are so-called passive investments that track market indices such as the S&P BSE Sensex, and have lower operating costs than mutual funds.

For investors who want to buy and sell individual stocks but are wary of newly-listed companies, blue-chip stocks have a longer track record and their history is out in the open for you to judge. While past performance has no bearing on future movement, it at least offers an indication of how their business strategy has held up over the years.

4. Recognize your motives for subscribing to an IPO

Do you fundamentally believe in the company and broader industry, or are you just looking for a get-rich-quick scheme?

According to Mint, between 2008 and 2015, almost two-thirds of IPOs in the Indian market traded below their issue price, despite a rising share price right after going public.

IPOs often attract speculators who are essentially playing a high-risk, high-reward game. Not all investors can stomach this fluctuation or have the knowhow to profit from arbitrage.

If long-term returns are your goal, there are better options than the IPO route, such as those discussed above.

5. Know how to evaluate the performance of newly-listed stocks

Investment bankers and underwriters set the offering price for the IPO based on numerous factors, such as market conditions and the company’s capital requirements.

High demand for a company’s shares doesn’t make the company more valuable. Rather, it means the company may be valued at a higher amount. This is about supply and demand, and isn’t really a fair assessment of the company.

You cannot judge the success of a newly-public company by its share performance on the first day, or even the first few weeks. It’s a milestone, not the metric by which it will be forever judged. Some IPOs underperform in the beginning, which causes investors to sell in a panic.

Once a stock has matured, earnings per share, price to earnings ratio, year-to-date returns are some common performance indicators.

6. If you’ve considered everything and still want to subscribe to an IPO, have the basics in place

You’ll need a demat account. Most banks have made it very easy to participate in IPOs online through a facility called Application Supported by Blocked Amount (ASBA).

This enables prospective shareholders to block the money needed to subscribe to an issue. IPOs tend to generate a lot of buzz and are often oversubscribed, meaning there aren’t enough shares for sale to meet investor demand. In this case, you may not get all the shares you want, or you may get none at all. If that happens, you’ll be offered a refund.

Of course, the traditional method of bidding for an IPO through a stockbroker still works.

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