An initial public offering (IPO) is when a private company makes shares of stock available to buy for the first time. When a private company decides to go public, they typically hire a brokerage house to handle the offering. The broker will then notify investors that the company is going public. Here are some tips on how to invest in IPOs.
Investing in a company that is going public for the first time requires intense research. Unfortunately, many IPOs do not have as much public information available as established stocks. Most companies offering IPOs do try and disclose as much information as possible, but it is not as readily available. It is possible to find information on the internet such as past financing, current investors, and information about the health of the company. However, investors may need to dig deep.
Review Company Prospectus
All companies must provide a prospectus if they want to become a publicly-traded company. A prospectus basically tells investors what the company plans to do with the money it raises from its IPO. Investing in a new company requires due-diligence, and a prospectus can provide valuable information. For example, it might disclose if the company plans to use the funds to pay back creditors, or it could detail a plan to use the money for market research or development. Never skip reading the prospectus when investing in an IPO; investors who fail to do so can risk losing money when they don’t fully understand the company’s intentions.
Acknowledge Underwriters and Brokers
All IPOs require underwriters and brokers to handle the transaction. In most cases, a well-known brokerage house will handle most high-profile IPOs. Goldman Sachs, JP Morgan, and Morgan Stanley are three well-known brokerage companies, and they usually bring strong companies public. However, there is no shield that prevents companies from tanking on day one of trading just because a big brokerage house handles the transaction. The bottom line is IPO investors should not expect guaranteed returns no matter who brings the company public.
Invest With Caution
When investing in an IPO, people should approach the transaction with caution. Too many new investors have made the critical mistake of blindly buying shares of an IPO. Many investors buy into the excitement of a new IPO instead of buying the facts. Although information is limited on many IPOs, that is not to say there is no information available. Make sure the company is a worthwhile investment before investing.