When to Invest in an IPO
IPO reports can be a little complicated to understand at first glance, but once you understand what they actually are, they become a lot less scary.
The very first stock sold by a private company that is available to the public is known as an IPO, which stands for the initial public offerings. When a company wants to grow and expand but needs capital to do so, they usually offer an IPO. Another reason to do this would be when a company wants to become publicly traded.
First of all, understand that an IPO is an investment; a risky one at that. It’s usually very difficult to predict what stock will do in the future because there is never very much data to analyze the company by.
So why would a company even want to go public in the first place?
- It raises money
- Better rates become available
- Mergers are easier when stock can be issued.
- It is more attractive to top talent.
How are IPO reports done?
- First things first, hire an investment bank. The bank works as the underwriters and go between the company and the public.
- Negotiate the deal. This is between the bank and the company. Issues to be discussed are the amount of money needing to be raised, security issues and other details.
- File the statement. Once all parties agree on a deal, a registration statement has to be filed. The statement includes not only the information regarding the IPO data but also financial statements and anything pertinent about the actual company.
- The waiting game. At this point there is nothing to do but wait for the SEC to approve the offering.
- Pick a price. Once approved the underwriter and the company can decide on a price.
- All systems go. After all of these steps are complete, the securities can finally be sold on the stock market.
Some things to keep in mind when looking at IPO reports are: if an IPO company has no history it will be even harder to analyze it’s future.
Don’t forget that the people involved here are salesmen, so IPO news is hyped up as much as possible. You can’t buy stock simply because it’s popular, it needs to be a good investment for you.
When a good IPO stock is resold to earn quick money, this is known as flipping. Because of this, if you are not in on the initial part, don’t buy the shares. Lots of IPOs gain a lot during the first day but will die off quickly after.
Beware of tracking stocks. These appear to be the same as IPOs but are just a spin off. Tracking stocks do not have voting rights so there is no board of directors to take care of the rights. A tracking stock can still be a good investment but just remember that it is not the same as an IPO.
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