IPO stands for Initial Public Offering. A private company which decides to offer stock to the public for the first time is called IPO. Here are some dos and don’ts if you are planning to invest in IPOs.
Back when the internet was just booming, investing in IPOs seemed like always a sure thing. However, investors need to scrutinize more which companies to put their money in. The game has changed from making a quick buck to gaining returns on a long-term basis.
Do your research
First, you have to conduct your own research. Read the IPO prospectus even though it seems hard to do so because of the jargon. As always, you know you fully understand something if you can tell anyone about it and how it works using layman’s terms. This also goes for IPOs; you should be able to tell anyone what the company is and it makes money as part of due diligence.
Assess the risks
Second, assess how much risk can you take. In other words, think of how much money you are prepared to lose. Set an amount and stick to it and never get too emotional when investing. This lessens the chance of trigger-happy decisions from occurring.
Know the business and the people behind it
Third, know the company and owners. Aside from reading the prospectus, it is also vital to know the timing why a company decides to go public. Check what the company has been doing in the past and why they have been successful. Learn how much owners invested in the company and pay structures. Do they give long-term pay incentives or options based on performance metrics?
Take note of the lock-up period
Fourth, wait for the lock-up period to end. The lock-up period usually takes three months to two years. During this period, underwriters and insiders of the company are not allowed to stock shares for a certain timeframe. If the underwriters and insiders are willing to let the lock-up period finish, it may be a good indication of the company’s bright future. Only then until the lockups expire can the mentioned parties be allowed to trade their stock.
Find a good broker but still be involved
Last, select a good broker but exercise own volition. Big time IPOs are hard to get, and these brokers will provide a way to get yourself involved in good and new IPOs. However, companies that are backed by known brokers sometimes hinder you from knowing other good deals. Boutique brokerages may have an edge over some brokers due to their specialized knowledge and experience in that field.
IPOs can get a lot of media mileage, and when this happens, the line between fact and fiction is blurred. It is best to check with the information filed in the Securities and Exchange Commission website to get additional facts.
Remember that a company has a lot of reason why it goes public. Financial strength is not always a good reason to invest in an IPO.
In the end, an IPO is an investment which can give good or bad returns. This is the nature of risks after all. Minimize losses and maximize gains by acquiring as much knowledge before, during and after an IPO.
(Featured image via DepositPhotos)
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