IPO Investment: Should You Invest in an IPO?

Daniel Penzing
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IPOs might sound exciting, but does that mean you should invest in them?

On that note, some investors are concerned that the the Companies Act has done away with the concept of allotment of shares on a pro rata basis to all applicants, which, according to them, is a bad thing.

On the other hand, some regulatory experts have a different take on this. While they do agree that the pro rata allotment is no longer a relevant concept, they believe that it has also been replaced by a new concept of public bidding.

They explain that while the old pro rata allotment system had been criticised for being credit-based, the new system is more market-based.

This trend has been seen in past IPOs, with companies such as Grasim and Arshiya, both of which found a lot of takers.

IPOs might sound exciting, but does that mean you should invest in them?

There are those who are eagerly looking forward to the IPO of Glenmark Pharmaceuticals—a major pharmaceutical company with several brands to its name.

The company’s Rs 9,100 crore IPO will make it the biggest IPO in India till date, dwarfing the likes of bank stocks, Infosys, and value-added services provider VAS.

However, while the IPO might be a major event for those on the stock market, most investors are wondering if they should be investing in it.

In this Guide:

  • You will know the three basic steps of an IPO investment
  • You will know what an IPO is all about
  • You will learn 7 of the most exciting IPO investment opportunities
  • You will land on the most important factors you need to check before investing in an IPO
  • You will learn about the most successful stories about IPO investment
  • You will learn how to find all kinds of information about an IPO investment on the internet
  • You will know how to avoid the most important mistakes in IPO investments
  • You will learn what investors say about IPOs

An Initial Public Offering, IPO is the first time when a company goes public to offer its shares to the public. It is thus an opportunity to make the best profit on your investment.

But as exciting as IPOs may seem, as a potential investor you should know that there is no “certain” gain. Please remember that an IPO is not the same as an Initial Coin Offering, which only involves tokens or coins. An IPO involves the capital of an entire business.

Let’s take a deeper look together into the vast and spectacular world of IPO investment.

What Is an IPO?

When a company wants to expand their business in big numbers, then you know they’ll make the big bucks, and you can get in on it for an investment to make sure you’re a part of all the money.

The initial stock offering is a time when you can invest in a company before they go public. This is the time to invest and be a part of the growth and expansion of the company, with a large share of the profit once it goes public.

Many people hold off from seeking an IPO investment because of the risky nature. If you choose an IPO investment, know it will have risk. You might gain a lot, or lose a lot. It might not be for everyone, that is why it is important to know if you are getting into it for the right reasons.

Normally, during this period, information on the business is limited, and you´re not going to get very deep information about where it will go. Most of the questions you have will not be answered.

Investing in IPO will help you gain connection with an investor, more focus and a better company you want to deal with.

« Check out this post to know what to look in IPOs before putting money in.

How Do I Invest in an IPO?

You can invest in an IPO from the time the company files for an IPO until the IPO date. This time frame is known as the “offering period.” From an investor’s perspective, that means that there is a fixed window of time in which you can buy shares of stock in an IPO and expect to make a profit when the IPO closes.

After the IPO date, the company begins trading on the stock market as a regular stock. Stock traders who buy the company’s stock before the IPO will set a price that they believe will attract lots of other investors, making it likely that their investment will turn a profit when the IPO closes.2

Some different ways to invest in an IPO include:

‾Third-Party Brokers: Before investing directly in an IPO, some investors prefer not to deal directly with the underwriting firm that is selling shares in the IPO. In this case, you can use an independent brokerage firm to buy shares in the IPO on your behalf.

A third-party brokerage involves another company selling an IPOs, but there is no underwriting. You will have to pay market price, instead of making a gain. Generally third-party brokers charge a transaction fee, and the IPO may have a lockup period.

Where Can I Find Out About Upcoming IPOs?

IPO stands for “Initial Public Offering.” It is the first time that a privately held company offers securities to the public. This allows new investors to buy shares of stock or stock options. Some investors even choose to invest in an IPO in order to earn a regular income from a company that is still private. An IPO is basically a promise of future dividends, increased capital, or increased share value.

After an initial public offering, a company has the money it needs to grow. It can also refinance current debts and pay back early investors. This is a really great opportunity for investors, but it should also be risky. Some companies grow very quickly after an IPO, but some fail to meet expectations or fail to grow altogether.

When a company wants to raise capital for investment via an IPO, an investment banker is the middleman. This is also known as a sponsor. The investment banker works closely with the company to get the IPO ready and also prepares the role for investment institutions to act as underwriters. Underwriters are responsible for explaining the company and the offer to customers.

They obtain orders for the IPO and make sure that there is enough demand for stocks before the IPO goes live. The underwriter then arranges for the company to sell shares to institutional investors and new investors.

Do Your Homework Before You Invest in IPOs

IPOs can be an excellent way to invest in businesses that have a lot of potential and whose stocks will rise a great deal once their shares become available to the general public. However, if you’re not careful, you can also lose a substantial amount of money if the business isn’t as promising as you thought.

So you should go into the IPO investment with your eyes wide open and with a realistic idea of what to expect.

The first step is research, research, and more research. In fact, many investors and brokers look carefully at a company’s business plan and IPO registration long before the stock is available to the public. If you wait until the IPO is already underway, you won’t be able to get as much information on the business as you would if you started long before the IPO was available.

Thoroughly check out the history of the company and what it has done in the past. If it’s a start-up company, investigate its directors, owners, partners, and executives. Also look to see if any of them have any experience with IPOs, especially ones that involve new companies. Learn about the company’s competitors, the competition’s strengths and weaknesses, and how your investment will help you succeed in the company’s specific market.

Why Do Companies File IPOs?

Initially, companies seek investors like you and me when they require capital for expansion. Their goal is to raise a significant amount of capital, and they need to grow fast enough to cash in on a potential market opportunity.

Companies going public after going through one of the world’s leading markets are often valued in the billions. According to Jay Ritter, professor of Finance at the University of Florida, there have only been five years in a half century that the number of companies that went public in the stock market was less than 100. The last time it happened was in 2002, and there was a substantial 21% decline in value of the year’s IPO’s.

IPO’s surged after 2006, and the number of companies to go public on the NYSE and NASDAQ increased by 50% in 2016. According to Ritter, there are several reasons why investors have been willing to buy IPO’s for the past several years.

Interest rates are low: The Fed has been keeping interest rates at an all-time low since December of 2008, and these low interest rates have made it easier for companies to increase their prices to offset the higher costs.

Historical Returns of IPOs

Take a look at the historical returns of IPOs and you may be sorely disappointed to find that they are often cutthroat and way below the norm for most investments.

The exact amount your IPO will be depends upon a number of factors such as past performance and industry trends as well as what the market is like for the period of time you choose to invest.

While some IPOs may not sound like a bad idea at first, there are also a lot of well established businesses that have IPOed that have not done so well.

The time that venture capitalists spend with a company to improve a business or an item before putting it up for IPO can make an enormous difference in the success of an IPO.

It is also important to expect that if an item does not do well during the IPO then there will likely be a drop in the price of it.

Avoid purchasing a low selling, cheap looking item that looks like it would sell for much less than the current sale price.

Taking a chance at an IPO could result in either a highly rewarding, lucrative return on investment or a total loss.

Starting low and gradually raising the price is sometimes enough to entice buyers to purchase stocks that may have initially struggled to ” pop ”.

This is done using a variety of techniques such as a secondary or subsequent offering of stock.

Risks of Investing in an IPO

Investing in an IPO can be a rewarding experience for many, and for others, it can be a costly mistake. As the investment in an IPO is considered highly risky, it is important to know the risks involved before investing in an IPO.

Planned IPO

The first major risk of investing in an IPO is the fact that it is a planned IPO. The company decides to sell its shares to the public on a specific date. Most of the time, IPOs are planned as not to be presented with competition. The investment becomes even riskier because of the level of uncertainty involved prior to the date of the IPO.

Prospectus

Because of the high risk involved in an IPO, the U.S. Securities & Exchange Commission (SEC) requires investment banks to present the proposed company to the public and supply investors with the prospectus of the IPO. The written prospectus, coupled with other information about the investment, can give investors a complete picture of the company and allow them to make more educated decisions about the investment.

Because IPOs are always sold to the public by investment banks, the companies featured in the investments are often those with high-profit margins and healthy profit margins. The potential for growth that can contribute to the company’s bottom line is also a factor that is taken into consideration during the IPO process. This leads to another risk.

IPO Investment is Risky, So Do Your Research

It’s easy to get swept up into the excitement of the latest IPO. The initial public offering of a company’s stock is a great opportunity for investors, but it’s important to consider several factors before jumping into the fray.

Getting involved in IPOs involves a greater level of risk than simply investing in existing stocks. When you buy an IPO, you’re betting on the success of a largely untested company.

When you buy into an IPO, you buy shares at the offering price, which is determined by the issuing company and the investment bank that’s managing the deal. If the offering is successful, the company’s stock is likely to increase in value and generate a profit for investors.

However, the stock may never rise in value. It’s a new company, which means there’s significant uncertainty about whether it will be successful. Do your research before deciding to invest in an IPO. Figure out how successful IPOs have performed in the past, and compare them to other investment opportunities. Consider the challenges that companies face early on, and make sure you’re comfortable with the company’s strategic and financial goals.