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There are few events more exciting for stock investors than when a company enters the stock market and makes its initial public offering (IPO). It signals to the world that a new investment opportunity is available, and those who get an early stake may have a chance at making a profit.
But what is an IPO exactly, and why do people get so excited about them? This article will explain the basics of what you need to know.
From Private to Public
An IPO is the initial stock value a formerly private company offers when it enters the stock market. Up until this point, private companies rely on funds accrued from bank loans, venture capitalists, and angel investors to remain operational.
When the company wants to go public (meaning they’re ready to enter the stock market), it will announce its intention ahead of time, declare the value of its stock, and clarify the day it will go public.
What Is an IPO Investment?
An IPO investment is what investors will pay to purchase a stock from a newly public company. The stock value can fluctuate during the first day of investing, depending on how many people are trying to buy it.
What Is the IPO Process?
A company must take many steps before being ready to go public. For starters, they must prove they’re a financially viable business model. They must consult with banks to help underwrite the move, and the banks will announce their view of the company.
The process requires precise timing, identifying the right time to go public. Companies don’t want to go public at the same time as other rising companies—they want to have as much attention to themselves as possible.
Is Investing in an IPO a Good Idea?
There’s usually excitement around the news of a company going public. But is that excitement worth an investment? It depends.
Most people invest in an IPO because of its potential for high returns. While it’s true that investing in a company in the early stages can maximize your chances of a profit, the opposite is also true. A company’s IPO may be a high point in its stock value, at least for the first few weeks on the market.
Too often, the high expectations of a company going public don’t directly translate to increased profits. Take Robinhood, for example—an incredibly recognizable company turned out to be one of the worst IPOs in history, with stock prices dropping more than 10% within minutes of opening.
How to Research IPOs
If you’re considering an investment in an IPO, it’s essential to do your research first. Here are three things to consider:
- Research the company: It may not be easy to find financial information about private companies. Past press releases are a great place to look. Also, consider how the company compares to its competitors.
- Judge the overall industry health: Is the industry as a whole growing or shrinking? If the industry seems to be struggling, it may not be worth your investment.
- Be cautious: Try not to be consumed by the excitement of an IPO. If an IPO’s details seem too good to be true, it’s always safer to err on the side of caution.
