Investing in an Initial Public Offering sounds sophisticated and makes one feel like Dalal street trader. For a layman, the term is fancy and full of confusion. With TV shows giving a distorted view of IPO’s and tips from self-proclaimed investing masters, a clear picture of the IPO market is needed. Investing has its benefits, but thorough research is what gives results and helps you in making a wise decision.
Many investors get excited about IPO’s due to the belief that stock prices will shoot up afterward. Thus, you may read about IPO’s getting oversubscribed. But making money is not easy in an IPO. One has to be accurate in his/herstrategy and aware of the risks as well. Even Warren Buffet invested in an IPO of Ford and then steered away from this market.
What is an IPO?
An IPO is a process where an unlisted private company offers its shares to the public for the first time. This provides the company with an opportunity to raise funds from the people in the primary market. Afterward, the company gets listed, and shares become tradeable in the open market. This is a simple understanding of Initial Public Offering.
Earlier, people invested to generate revenue fast by buying at a cheaper rate and selling when the IPO picks up. Nowadays, the focus has changed towards the long-term growth of a stock. During the 90’s, IPOs were extremely common and got a lot of attention due to individual investors that made making gains look easy. But many companies tanked after showing massive progress on the first day, and soon the bubble around IPO burst.
Here a few tips that you must keep in mind before investing in an upcoming IPO.
It isn’t easy to get information about private companies. Most publicly traded companies are analyzed heavily to find any gaps or confidential information. But private companies seldom get much attention. Usually, the companies put out a prospectus with all the information. There is a chance that it may be biased. So, research online about the company, the industry, financial information. You may not find the exact data but having a good idea about the company helps in making a calculated decision.
A prospectus’s information may seem unreliable from the above point. One must still read it carefully and never skip. You can request your broker for the prospectus. Reading it will make you aware of the opportunities and risks of the company. Also, the prospectus contains a detailed explanation about how the company will use the raised money. Make sure that the money is being deployed towards expansion, research, or marketing. If a company proposes to repay its loans from IPO’s money, then the company is not worth investing in.
A legal contract between the underwriters and the company’s insiders that binds them from selling shares for a statedduration is known as the lock-up period. Generally, it ranges from three months to two years. It is considered an excellent strategy to wait till the insiders can sell their shares in the market freely. If insiders stick with the stock after the lock-up period ends, it is a sign that the company has a bright future. So, it is better to wait before acting.
It is difficult to find successful companies that go public. With the right mindset and skepticism, you might find the right cues and make an informed investment. An investor should not avoid the IPO market for its uncertainty. There are many investors who have gotten exceptional rewards from their holdings.