IPOs, or initial public offerings, are an exciting time, both for the company going through the IPO as well as investors. Here’s everything you need to know about IPS from an investing perspective.
What is it?
An IPO is a process by which a company goes from privately held to publicly traded. There are many changes that take place within a company when this occurs and one one of the most important is that the company has to provide much more information than it did as a private company. IPOs are very public events and don’t happen in secret. At a certain point, the company will make an announcement of it’s intent to go public. There are usually months between this announcement and the actual IPO. A common primary goal for the company is to get a very large amount of money very fast, as both a number of shares to be sold and a price to sell them at will be picked. As an investor, there are a couple reasons to be interested in an IPO. Often, getting in on the ground floor is attractive in and of itself. Additionally, in many cases, the stock price at IPO is the lowest it will be for a very long time.
How do I participate?
You’ll need a brokerage account, and that’s pretty much it. Once the date is made public, you’ll be able to buy and sell the stocks after that point. When the date is announced, it will likely be accompanied by a price. Don’t be fooled! This price isn’t the ‘public’ price. This is a price reserved for a relatively small group of people, specifically picked investors or employees, usually. The picked investors are usually very, very large. The actual price you’ll pay is what is available on the open market and that may look nothing like the offering price.
There are quite a few risks in attempting to participate in an IPO. Of course, this is an investment and all investments carry some risk. However, there are some additional risks for this particular process. One is that there is often a lot of media noise about an IPO for some companies. This can lead some to invest without doing the proper research. This is a big risk, as this is still an investment and should have the same amount of research as any other investment. In addition to this, many beginner investors view IPOs as sure bets. They aren’t. There have been as many huge IPO failures as there are fantastical successes.