The world of IPO investment is exciting, volatile and full of massive gains potential. This article will help readers to understand the basics of investing in IPO stocks and what to watch out for. If you are looking for a beginner’s guide to IPO investment, look no further.
IPO is short for initial public offerings. IPOs are the first time that a company is issuing stock. For a company to be able to issue stock they often have to go through a very arduous process. For many investors, new companies going public is a big risk with high rewards.
There are essentially two types of IPOs. The first is commonly known as a “startup IPO”. These IPOs are stocks that are being publicly traded by smaller startup companies. Often, these companies are untried in terms of business viability. They are often good ideas in need of financial backing. As you can imagine the risk in startup IPOs is high.
The second type of IPO is when the company that has existed for a while and is privately held decides to go public and sell their stock. This is usually done by the company to generate some form of capital for expansion. This type of IPO is much less risky but often has much less reward.
Investing in IPO stock is not for risk averse investors. Investing in IPO stock is also not for generalists. If you are interested in investing in tech startups and have no experience in the tech industry, you run a greater risk of investing in companies that will flop. Why is this? Simply because many startup companies are extremely passionate and are able to make their companies look better than they actually are on paper.
Investing is a numbers game. If one is to become a successful investor they must remove emotion from the equation. It may seem like a good idea to invest in that cool little startup that you heard about from a friend, but six months down the road when they have spent all of your money and lost it all, your financial losses will outweigh any emotional attachment you may have had with the company.
One of the major problems with IPOs is that the stock prices often start extremely high. For example, a brand new company may issue stock at $25.00 a share as its IPO. As soon as six months later it could be down to $15.00 per share.
Some companies that decide to file for initial public offerings are not even profitable when they go to market. They may be operating at a loss hoping that an influx in capital via public trading will give them the boost they need to record a profit. More than half of all IPOs decline in value within the same calendar year that they are issued.
All of that being said, there are stories of individuals who have bought into IPOs and made millions because of their gamble. Often these people, as stated earlier in this article, are experienced industry types. They often have experience in the industry in which they are trading and know what to look for when determining the profitability of any given company.
You can make good money in IPOs. If you decide to move forward with trading in IPOs, consult a broker who has experience with this type of stock.
By Mike Shreeve, MBA, Business Consultant