Initial Public Offering 101

Investing in IPOs can be tricky. Especially with the buzz around public offerings nowadays, one might wonder how he can effectively maneuver through all the trends.

What is it?

An IPO is essentially a private company that offers its stocks to the general public on a stock exchange. It’s a way for firms to “go public” and become investable, allowing them to raise capital from retail and institutional investors. Before the IPO, companies usually had only a select few people to invest in. But after the IPO, anybody can become the firm’s investors.

How does it work?

When a company reaches a certain level of growth and feels that it’s mature enough to go through the rigors of SEC regulations, the first thing to do is to hire underwriters to decide which exchange to trade publicly on. Underwriters are risk experts who can determine the initial offering price of the securities, buy the securities from the issuer, and sell the securities to investors through their own network.

Uber debuted Friday, May 10, 2019 on the New York Stock Exchange at $42 per share, trading under the symbol “UBER”

IPO Advantage

An IPO provides firms with a wide access to raising lots of money from the public. This is critical to growing and expanding business operations, as it will help further the firms’ research and infrastructure. In addition, by publicly issuing shares, lesser known companies have the opportunity to generate attention and have the prestige of being part of a major stock exchange.

IPO Disadvantage

One huge setback to going public is the time and resources it takes for the entire process to complete. An IPO will usually take somewhere between six to nine months and the company’s management team may not be able to focus on other parts of the business operations during this time. Moreover, companies will need to hire financial services and underwriters to help with the process, which in turn, will add more to the expense fees. And lastly, going through with an IPO will bring in countless shareholders. Shareholders with significant ownership stake in the company can vote to override management decisions, which means that companies will then need to count their votes before making significant changes in the future. This can be problematic if you want to make decisions fast.

Slack Technologies became a public company on April 26, 2019 on the New York Stock Exchange at $26 per share, trading under the symbol “WORK”

Invest in IPO?

With any investments, there are always risks involved. IPOs are especially sensitive to market movements and you really have to be grounded in your investment philosophy to stick through. If you pride yourself in finding the best company shares to buy, then you might be strongly attracted to the “possible” gains in IPOs. For example, imagine how much money you would’ve gained if you had invested in Google when it first became a public corporation. Google’s initial public offering in 2004 was priced at $85 per share. Google’s stock is now valued at $1,294.74.

But if you aren’t too sure whether investing in IPO is a good idea, evaluate your current portfolio and determine if adding the IPO stocks will bring a good balance to the overall structure. If you need further assistance, maybe go see a financial advisor. The most important question to consider is what are your goals? What do you want to achieve with your portfolio? If the answer is steady long-term growth, then IPOs may not be the best option for you.

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