Initial Public Offers (IPO): Facts you must know

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An IPO, or Initial Public Offering, is the first time a company offers its stock to the public. The first-ever recorded IPO was in 1602 by the Dutch East India Company. Just like how it sounds-an “IPO” stands for “Initial Public Offering.” 

Recently, we’ve seen some big IPOs from companies like Facebook and Amazon. If you have an interest in investing in these large companies, you need to know where to start. Here are some common questions and answers about buying stocks:  

What is an IPO?

An IPO, or Initial Public Offering, is the first time a company offers its stock to the public. This is the first step toward becoming a public company. Members of the public are invited to own a piece of the company through the purchase of stocks.

Why do companies issue IPOs?

When a company issues an IPO, it’s basically looking for funding to help grow the business. Instead of borrowing money from banks, companies can tap into their future revenue stream by selling shares of their stock. Where the company borrows, it has to deal with the repayment of capital and interest. Funds received from the IPO form Capital of the business. The company can then commit these funds to long-term projects. At the end of the year, the investors will be paid dividends from the profit generated.

What is the process of issuing IPOs?

First, the company needs to hire an investment banker and a law firm to handle the IPO. This includes hiring underwriters who will help assess demand for shares before pricing them. Underwriters are responsible for writing a prospectus that discloses everything about the company looking for investors. This includes things like their financial track record as well as risks involved with investing in the company. The more risk factors there are, typically mean the higher the potential reward. The alternative is also true.

The process of getting the funds from the public to a company (also known as listing) is highly regulated and cannot be covered in this article. We shall cover it in the future.

All we can say now is that after the process is complete, the shares become available for purchase at the offered price. You can buy the shares on an exchange or securities market like NASDAQ or NYSE. Note that not all companies choose to sell their stock through IPOs initially.

You can read about 75 terminologies you must know about the securities market.

What should I look for before investing?

There are several things you need to consider when looking into buying IPO stocks. This included the experience of the investment banker in previous IPOs? What kinds of risks are there surrounding the industry that the business falls into. Whether they’re growing fast enough compared to other businesses within their same industry. Another thing you’ll want to do research about will be the growth potential for this company within and how much room they have to grow. Are they operating in an industry with growth potential?

Companies planning to issue IPOs are required by regulation to offer true and complete information to the public. These regulations are meant to protect the public from unscrupulous people who would misrepresent information and dupe investors. So, please read through the information memorandum to get all this information.

Who are good candidates for buying stocks?

Generally speaking, individuals looking for long-term growth should buy stocks in companies they believe have potential or that show steady signs of growth over time. Of course, you can always invest in safer securities like government bonds, but you need a diversified portfolio.

Companies can also invest in stocks of other companies to diversify their income streams. This could also offer strategic advantages, such as a preferred status in their supply chain.

IPO Explained

There are two types of IPOs – “hot” and “cold”

What is a “hot” IPO?

A hot or “fiery” IPO is one that’s anticipated to be very popular with investors. These IPOs are typically well-known companies, like Facebook and Apple. When everyone knows about an upcoming hot IPO, it often results in higher demand for the stock. This can make shares of the company more expensive than usual because of scarcity. 

What is a “cold” IPO?

On the other hand, cold IPOs are ones where there isn’t much anticipation from investors before going public. For example, not many people knew Pinterest was working on their own version of Instagram called Bolt so when it went live, it didn’t have that much demand. As a result, these stocks are typically cheaper when they first go public because there isn’t the same level of interest from shareholders. Of course, the Bolt has since changed and have recently raised $393million in 2021.

My parting shot. Before making any decisions regarding which company to purchase stocks in, here are just a few tips:

Do Your Research – Make sure to read up extensively on each company before deciding if they’re worth your investment dollars.

Always Invest Within Your Risk Tolerance – Not every person has the same risk tolerance, so make sure to invest within your comfort level. If your risk appetite is low, then concentrate on low-risk investments such as Government Bonds.

Diversify Your Portfolio – Although it’s great to find companies that you believe will do well over time, keep in mind that not all of them are winners (and vice versa). By dividing up your portfolio evenly among different assets, you’ll be protecting yourself from any losses on one stock.

Putting Money Aside For Emergencies. Even if investing is fun and exciting sometimes, remember why we save- for emergencies! Some people use an app called Acorns or Stash where they can put aside small amounts of cash each day/week/month, so they aren’t tempted to withdraw money.

IPOs are a hot topic in the finance world. If you’re looking to get into investing, then this is an important concept for you to know about. Thank you for giving us your time. We shall continue providing you with essential educational material to help you make smart financial decisions.

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