An Initial Public Offering (IPO) can generate a lot of coverage in the news. It’s an opportunity to own the first publicly-traded stock in a company and to potentially realize capital gains. However, IPOs aren’t always a good investment, and it can be difficult for average investors to take advantage of these opportunities. If you want to invest in an IPO, here’s what you need to know:
Determine the timing. Some IPOs are all over the news, but others are more obscure. The Financial Times, The Wall Street Journal, and financial websites such as The Motley Fool can alert you to new IPOs. You can also check with the Securities and Exchange Commission (SEC) for the most recent updates.
Learn how to buy: Not all IPOs are open to the general public, and many underwriters don't want to sell the shares to average investors. You may be able to buy directly into the IPO through the bank managing the sale, an online venue, or a stockbroker who may invest in the IPO on your behalf.
Do your research. Not all IPOs are superstars. Even though a company’s stock may increase in value after going public, it can quickly lose its value after the first weeks of trading. Before investing, discuss the reasons why you want to invest in the IPO with your financial advisor. Your advisor can help you review analyst reports of the company, research overall sector performance, and look at the company’s history. Consider the reasons for the IPO, the quality of its executives, and the patents and trademarks it may be relying on to build its business model.
You can find much of this information, along with potential risks the business faces, in the company prospectus , which must be filed with the SEC as part of the IPO.
Evaluate the price: The public offering price should be above the dilution for an IPO – the amount of money the original investors averaged per share. Otherwise, it indicates that the business may not have gained in value. You can find information about the dilution in the company prospectus.
Researching an IPO may help you see past the hype and determine if buying the stock of a company is a good move for you. You also should consider how the stock fits into your overall asset allocation strategy. If you aren’t sure about some of the factors involved, consult a financial advisor to help you make your decision about whether or not to invest.
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