IPO stands for initial public offering. It refers to the first time a private company’s stock is being sold in the stock market to the public. The idea of IPO became popular in the 1990s when investors could buy stock from almost any company with a guarantee of getting hefty returns.
While some companies lived up to their promise of paying handsome returns to investors, others turned out to be a disappointment.
What does it mean to participate in an IPO?
Participating in an IPO is still a popular investment opportunity despite the few companies that have disappointed investors. However, it is crucial to understand what you are getting into before buying stock from a private company that’s going public.
The process starts with an investor identifying a company that has decided to go public. This can be done by going through S-1 forms usually filled by the Securities and Exchange Commission (SEC).
In order to take part in an IPO, one has to register with a brokerage company. Whenever a company wants to go public, they usually notify brokerage companies who also inform investors. According to the experts at SoFi, “Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss.”
So here are five tips for a risk-free IPO investment:
1. Do your homework
Buying stock from new or private companies is in itself a risk. This is because there is usually no adequate information about the future prospect of that particular company. As such, it is advisable to take your time before deciding to invest your money.
Carry out deep and objective research and avoid being swayed by the public. Indeed, companies usually try to disclose a lot of information about their business dealings. But the information may not be absolutely accurate or objective considering the fact that they are the ones who write that information.
2. Choose a company with strong brokers
This is also an important factor to consider for those who choose to participate in an IPO. Investors should try and choose a company that has a strong and experienced underwriter. This doesn’t mean that other brokers don’t bring valuable companies. It’s just that quality and strong companies are often associated with good returns in terms of investment.
One advantage of boutique brokerage firms is that they have a controlled client base. This makes it easier for any investor to participate in pre-IPO investing with SoFi.
3. Never forget to read the prospectus
While it is good not to put all your trust in the prospectus, you should not ignore it completely. It is advisable to peruse through it and find the details of the company. The prospectus usually puts bare the risks involved as well as the opportunities that investors will be exposed to after investing in the company.
4. Exercise caution
As mentioned earlier, every investment opportunity comes with a share of its own risks. Although sometimes it is difficult to avoid risks, it is wise to take calculated ones.
5. Try waiting for the lock-up period to end
A lock-up period is a legally binding agreement between the company insiders and underwriters. The contract denies investors the right to sell shares for a certain period of time.
In general, IPOs are a great investment option. However, it is important to consider several factors when buying stocks from any company.