Summary List Placement
The market for newly public companies is an exciting one. Who wouldn’t want to enter the “ground floor” of a company with the opportunity to profit from its future growth?
But investing in an initial public offering (IPO) can be confusing, if not downright risky. If you’re thinking about investing in IPOs, it’s important to remember that many IPO stocks underperform broader market benchmarks in the long-run. Not all IPOs become unicorns.
But profits await for those who pick the right IPO stock. While financial institutions, company insiders, and wealthy clients typically have greater access to IPOs, the average retail investor can also get in on the action.
But just because you can invest in IPOs doesn’t mean that you should. Here’s what you need to know when deciding on an IPO stock.
In the news: A Baker McKenzie study finds that a record number of IPOs were made in 2020, amid the COVID-19 pandemic. Data from StockAnalysis.com also shows that IPO activity is currently outpacing 2020’s numbers.
Understanding the IPO process
With an IPO, a private company “goes public” by offering its stock for the first time on a stock exchange, like the NASDAQ or NYSE. In order to make a registered offering, a company must file a registration statement with the US Securities and Exchange Commission (SEC).
The IPO process differs from a direct public offering (DPO) in which a company directly lists its stock on the market.
Companies go public primarily to raise capital or expand operations. With traditional IPOs, businesses hire an underwriter — usually an investment bank — who leads and directs the IPO, drafting the company’s prospects, setting the IPO price and drumming up interest from potential investors, known as an IPO roadshow.
Why IPOs have been historically exclusive
IPOs have long been more accessible to institutional entities (eg. hedge funds, mutual funds, insurance companies) and high-net-worth clients with more capital to trade.
While company executives (and sometimes employees) also have access to IPO shares, investment bank underwriters typically give larger amounts of shares to institutional clients because they believe that they’re better equipped to purchase the shares and assume any risk over the long-term, according to the SEC.
But several online brokerages have created ways for retail investors to get in on the action. If you don’t want to wait until a company’s IPO shares have listed on the exchange, you may be able to get in at the offering price.
How things are changing for the retail investor
Many discount brokerages have given retail investors more access to IPOs. These online platforms allow you to “participate in an IPO,” but you’ll usually need to meet several eligible requirements before you can request shares.
Some brokerages have minimum account size mandates, and most require you to read a company’s prospectus and financial disclosures before you move forward in the IPO process.
Why IPOs are popular with investors
IPOs can be intriguing for a number …read more
Source:: Business Insider