Investing in stocks can give your massive return; that is if you invest in a profitable company because as long as the company is making profits, you are sure of increase in dividend payment. Another way invest in the stock market and make plenty returns is by investing in IPO before it gets to the general market.
Before delving deeper into the topic “How to invest in an IPO for beginners,” I think it would be very helpful to first define what an IPO is. In the simplest of terms, an IPO basically stands for Initial Public Offering. An Initial Public Offering (IPO) is the prize value or prize at which the share of a company is sold to the general public.
If a company decides to sell shares to the public for the first time, then it is called an Initial Public Offering or IPO. You can actually invest in the share of a company during the waiting period before it gets to the general public.
IPOs create hype in the market. If a new company holds great promise, it is enough to make investors fight over for its initial offerings. It provides investors the first opportunity to invest in a company trading on the public market for the first time. The catch to this is that, IPOs are sold for a low price but this can double or triple in a matter of days. Wise investors can make significant profits by flipping their IPO shares.
In this article, I will explain how the Initial Public Offering (IPO) works and take it a step further by giving you tips on how you can invest on IPO before it goes public and make money. It is good to note that not all IPO are worth investing on before it goes public as some stock brokers will advise you to allow the stock to gather momentum for the first few weeks or months before you can invest in the stock, but in most cases, the value of most IPO’s skyrocket after it hits the stock market and if you invested in it before it got to the public, you will make massive returns from it.
How Initial Public Offer Works
When a company wants to go from Limited Liability Company to a public liability company or when a public liability company wishes to expand and invest in other businesses, there is need to raise enough capital and the interest rates that comes with bank loan discourages the companies from using an option to get loan from the bank. The only other option they have is to sell the shares of their company to the general public in exchange for the money.
If a company decides to sell its shares to the general public, it doesn’t just go straight to the stock exchange market to list the shares; the company contacts an investment bank. The investment bank and an underwriting company may decide to buy off the shares and resale to the market if the estimate that the value of the shares will increase once it hits the market.
The investment bank goes ahead to file the company’s shares in the stock market. Before a stock goes public, there is a waiting period of up to 2 months to allow the stock market commission verify all the details the company gave to them. If you buy shares during the waiting period it means that you are investing in IPO before it goes public.
From the explanation I gave above, you see that ; the next section of this article will be on how to get started in getting IPO’s before they go public.
Investing in an IPO Online Like a Pro Before It Goes Public – A Beginner’s Guide
1. Have An Account In An Investment Bank
From the brief explanation that I gave above on how the IPO procedure works, you can see that an investment bank is involved in the whole process of getting an IPO into the stock market. To get information on which IPO is currently in SEC waiting period, you have to have an account in a big investment bank. You have to be active with trading in your investment accounts, and also you can get close to your account officer to help you get info on which IPO will be going public soon, so you can buy during the waiting period.
2. Look for the Latest IPO Issues
Search for companies which are about to issue IPOs. This job is pretty easy to do since IPOs are heavily advertised. Aside from the fact that there is a statutory requirement for an IPO to be advertised, companies would want to make sure that their issue will be a success, hence, more advertisements on their part. Other opportunities can be found through online resources such as the Securities and Exchange Commission site. These sites offer information on upcoming IPO issues.
3. Research on the Company-: After you have gotten the basic information on the companies that their IPOs are SEC verified, you have to carry out an extensive research on the company.
4. Read the Company’s Prospectus
Before applying, always make sure you review the preliminary prospectus of the companies issuing IPOs. The prospectus is a document including an invitation for the public to buy shares and other information related to the company. Information that must be included in a prospectus includes the company’s financial situation, its management, and its operation. Prospectus also includes risk factors in buying IPOs. These are the worst-case scenarios that can happen to the company’s shares in the stock exchange market.
Prospectuses are usually an initial indication of an investment’s potential success or failure. By evaluating each prospectus of the companies issuing IPOs, investors can have an idea on what company to invest their money into.
5. Determine the Dilution of an IPO
The dilution is a portion of the prospectus showing the original investor’s average amount of money per share. More often than not, the public offering is usually above this amount. If this is not the case, it may mean that the value of the business did not gain. The dilution should also indicate the percentage of the original investors who will drop their shares when the company goes public.
6. Compare Offering Price
Investors need to consider the amount they are willing to invest in an IPO and the return they hope to gain. These factors play a major role in determining which IPO to choose. It may be worth the risk to take shares from a company with a great potential but offers a high price for their share. But then again, it may be a good deal to take shares offered at lower prices if the shares will not be kept in long terms.
7. Picking the Preferred IPO
If the right IPO has been chosen after weighing in all the pros and cons of the other IPOs, then it’s time to buy it. One way to pick the preferred IPO is to find the right bank that will be responsible in managing the sale. Through this, it may be possible to buy shares directly from the bank even before the initial offering occurs.
8. Invest In a Company That Has a Strong Underwriter
An underwriter is a company that assumes responsibility of the company’s share or they most times buy off the shares to sale later to the public. A strong underwriter company cannot invest in the shares of a company if they don’t have the full faith that the stock will increase in value in the nearest future and bring them returns.
So invest in an IPO that has the backing of a strong underwriter company; because for the underwriter company to back up the company’s IPO, they know the value of the shares will skyrocket once it hits the stock exchange market. Some top underwriter companies are Goldman Sachs in the US and Lloyds in the united kingdom.
9. Be Cautious of Initial Public Offerings from New Companies
Investing in the IPO of a new company is a dicey affair because the new company doesn’t really have past information and records that you can cross check to know the past performance of the company in order to predict what the future performance of the company’s shares in the stock market will be like.
It is better to invest in the IPO of a company that have been in existence and operation for a while but just decides to go public to raise capital to expand the business; as the past performance and financial records of the company will give you an idea of how valuable the company’s IPO will be in the stock market.
10. Consult Your Stockbroker
Another way is to hire a stockbroker who will do all the necessary things on the investor’s behalf. If have done your own background check on the company and are not still sure of the IPO, you can consult your stock broker to run an ID on the share in question. Most stock brokers already have information on IPO waiting to get to the public, you can seek the broker’s opinion and advise to know if the stock is worth investing on before it gets to the public.
Aside from giving advice on how to invest in an IPO, stockbrokers can also manage an investor’s stocks. Resorting to online services is also a way to buy IPOs, which lets investors to buy and sell stocks on their own. You have seen the process and IPO passes through before it gets to the general public, I have also dropped some few tips that will help you get knowledge of, investigate and invest in the IPO of a company before it gets to the general public.
10 Factors to Consider before Investing in an IPO
Investing is a good way to have passive income to supplement your existing income. However, not everyone who invests gets to reap the benefits of their investments. Some people buy into some shares and stocks and, at the end of the day, are left with mere share certificates with no solid financial value.
Initial public offers are even trickier because the company hasn’t been tested and cannot guarantee to be trusted in the stock market. Most of the time, investors buy shares with the hope that their investment grows over time. But if that doesn’t happen, that’s hard-earned money flushed down the drain. So what are the factors you should consider when you want to invest in an IPO, so you don’t end up losing your money?
a. The company itself
Your first step is to carry out an objective research on the company that you are about to invest in. Private companies are a lot more shrouded in secrecy than public companies. And it might be difficult to uncover as much information as you would need to make a decision just from looking at the prospectus, which has most likely been written by them. Therefore, it’s your duty to conduct an objective personal research on such companies. This will help you uncover any potential weaknesses or dangers.
b. Facts from the prospectus
The prospectus is not just some fancy book that holds the forms you have to fill when investing in an IPO. Usually, it contains a whole lot of information about the company, its future plans, its strategies, its financial statement and earnings over the years, its managers and other vital information. Just by reading the company’s prospectus, you will be able to look into the company’s prospects for growth as well as its potential future and sustainability.
c. The Company’s underwriters
Another important factor to consider is the company’s underwriters. Yes, the quality of the company’s underwriters can tell you a lot about the company. Good and reputable underwriters are usually quite picky about the type of company they choose to do business with. So, if the underwriters are good, the company will most likely be a reputable one.
d. The truth underneath the hype
Don’t get carried away by all the hype that underwriters use to ensure that they sell as much IPO stocks as they can. Most of them tout IPO’s as “once in a lifetime” opportunities and make them look like you are missing out on something big if you don’t seize the opportunity. But you must always learn to look beyond this and invest in good and viable offers and not just because it’s an IPO.
e. The lock-up period
Usually, underwriters sign contracts with company officials barring them from offering any company stocks for sale with a period of three to twenty four months. This contract when signed is legally binding and must be strictly adhered to. This period is known as the lock-up period. What usually happens after this period lapse is that officials rush off to sell the stocks as soon as they are free to do so, thereby forcing down the prices of the stocks tremendously. But if the company is a strong one with good prospects, the opposite would happen; most insiders would prefer to hold on to their stocks. Therefore, it’s always better when you hold off investing in an IPO until after the lock-up period has lapsed.
f. Company’s objectives for going public-: Another important factor to consider is the company’s reasons for deciding to go public. Find out why the company is trying to raise funds and how viable its expansion or investment plans are.
g. Nature of the company’s business-: It also helps to always invest in a business that you understand. You must ensure that you properly understand the nature of the company’s business as well as its position in the industry it operates in.
You should also carefully consider the issue of pricing. It is important to avoid overpriced stocks because when a stock is over-priced, prices would usually drop back to its fair price. Hence, you must try to compare the prices of the IPO to the market prices of similar stocks in the market.
i. The company’s management
The management and executives of the company are highly responsible for the success or failure of the company. Therefore, you need to ensure that you look at the credibility of the company’s management, their experience, history and level of competence.
j. Customers and goodwill-: These are also key factors and major determinants of the performance of a business in the long run.