An Initial Public Offering is when a private company floats shares or stock to trade publicly for the first time in the stock exchange. It happens when a private company with a small group of shareholders wants to raise capital to expand the company or if some private company owners want to sell their stake in the company. Companies that decide to go public by trading their stocks must regularly disclose financial information to their shareholders as a requirement by law because they are accountable to their shareholders. Let’s go through the four tips that can help an investor interested in investing in an IPO:
Read the company’s prospectus
The prospectus shows how the company intends to invest the funds from investors. The prospectus elaborates the company’s plans meaning an investor can assess the risks and opportunities of investing in a company.
Independent research
Going through a company’s prospectus is a clever idea but doing your independent research is wiser. Most companies tend to paint a rosy picture about their prospects, especially private companies that want to go public. You should check the company’s annual growth and compare it with other companies in the same industry. Learn about the company’s business model, who its competitors are, and their future growth potential. Reading and learning about a company is the way to go.
A reputable stock broker
A company with a strong underwriter is usually a good sign because stock brokerages with a reputation to protect cannot commit to underwriting for a company that doesn’t have good prospects. For example, a company like Goldman Sachs is associated with successful IPOs. So many investors choose IPOs based on who the underwriter is.
Caution is key
As much as the Securities and Exchange Commission requires that companies provide financial information in a prospectus, this still doesn’t give you the complete picture of a company’s entire history. It is particularly true where your stockbroker is pitching a particular IPO to you; this usually means a high number of these shares available that prominent money managers and institutions decided not to buy. And for this reason alone, you should be skeptical about such stocks because if the experienced people in the business like prominent money managers are not interested, why should you.
All investors should know that investing in an IPO is risky, just like all other business ventures. No amount of caution and research can eliminate all the risks involved. You have to take a measured approach.