IPO Stocks and How to Navigate Through Them

1. IPO Stocks and How to Navigate Through Them Have you heard about Initial Public Offerings? What about IPO stocks? Well, even if you haven’t heard of these terms, it’s good to stay up to date and learn about what they exactly mean. What Is An IPO? An initial public offering, or IPO, is the very first sale of stock issued by a company to the public. Before an IPO, a company is considered private, with a relatively small number of shareholders made up of early investors (such as the founders, their families and friends) and professional investors (such as venture capitalists or angel investors). A forthcoming IPO is also commonly known as ‘Going Public’ or ‘Being Listed’. Why Have An IPO? The simple reason is to procure funding. Going public raises a great deal of money for the company which it can redirect to growth and expansion. Private companies have many options to raise capital such as borrowing, finding additional private investors, or by being acquired by another company.But announcing a forthcoming IPO, by far, raises the largest amount of money. What Are IPO Stocks & How Should an Investor Treat Them? So, a company has just completed its IPO. These IPO stocks are now tradable but have their own set of risks and opportunities. This must

2. be considered before buying IPO stocks in a company that has recently gone public. An investor will not be able to analyse IPO stocks easily since there is virtually no history available to draw on. The information will come in the form of the prospectus. When reading the prospectus, look for the usual information but also pay special attention to the management team and how they plan to use the funds generated from the IPO. Another point to take note of is the quality of underwriters and the specifics of the IPO. Successful IPOs are generally supported by bigger brokerages. It’s a good idea to also be wary of smaller investment banks because they may be willing to underwrite any company. Now we come to a few months following the purchase of IPO stocks. An investor might notice that the stock has fallen. This would be because of the expiration of the lock-up period. When a company goes public, the underwriters make company insiders such as officials and employees sign a lock-up agreement. These are legally binding contracts between the underwriters and insiders of the company prohibiting them from selling any IPO stocks for a specified period of time. This usually ranges anywhere from 3 to 24 months. Bottomline Don’t jump into a forthcoming IPO, ready to invest in IPO stocks at the drop of a hat. It’s quite tricky to get into a good IPO, if not impossible. And, always remember, there will always be a lot of hype surrounding IPOs. Make decisions about investing in an IPO very carefully and only by assessing a company’s past and, by reading the prospectus thoroughly, what it plans to do in the future.