IPO Investment Tips and Strategies - An initial public offering or IPO is the first time the stock of a private company is sold to the public. In the dotcom mania days back in the 1990s, investors had the privilege of throwing their money in just about any IPO with the guarantee of it generating amazing returns, at least in the beginning. Those who had the foresight to get into and out of these companies made investing look much easier. Unfortunately, many companies that were newly public experienced huge first-day revenue but ended up being disappointing for investors in the long run.
Soon enough, however, this tech bubble exploded and the market of IPOs returned to normalcy. In other words, investors no longer had the luxury of walking away with double or triple-digit gains which they had a shot at in the early tech IPO days that came with simply flipping stocks. Nowadays, there is once again much more money to be made in IPOs, but the focus of this has shifted. Instead of trying to capitalize on the initial bounce of a stock, investors are much more inclined to carefully scrutinize its long term prospects.
Sifting through the riff raff and finding Upcoming IPOs with the most potential is key for investors today. A good first step is to learn as much as one can about the company before it goes public through an IPO. If you are looking to invest in an IPO, here are a few tops to keep in mind.
1. Research Obsessively
Gathering information on companies before they announce themselves in an IPO is not as easy as it looks. Unlike most companies that are publicly traded, private companies usually do not possess swarms of analysis who are covering for them, attempting to uncover more details about their performance behind their corporate armor. Keep in mind that although most companies fully attempt to disclose all the information regarding their prospectus, it is still written by them and not through a third party that is unbiased.
Carry out a full-fledged online search for information on the company and its competition, including past press releases and financing, as well as the industry's overall health. Even though decent intel on this may be scarce, learning as much as you can about the company is an essential crucial step when it comes to making a wise investment. Alternatively, your research could also lead to the discovery that the company's prospects are being overblown and therefore not the best investment opportunity for you.
2. Choose a Company With Strong Underwriters
A key IPO investment strategy comes when selecting the company. When you do select a company you would like to potentially invest in, ensure it has a strong underwriter. Quality brokerages are much more likely to be associated with quality. It is very important to exercise excessive caution when choosing smaller brokerages as they may be willing to underwrite the company. For instance, based on its reputation, a broker can be less or pickier about the companies it underwrites than a much smaller and relatively unknown underwriter can.
However, there are positives to opting for a boutique broker, rather than a large scale broker as well. Boutique brokers have a much smaller client base. With a smaller base, these brokers make it easier for the individual investor to buy pre-IPO shares, although this, as mentioned below, can also be a red flag. Stay wary that most large brokerage firms will not permit your first investment to be through an IPO. Typically this is only reserved for the individual long-standing, established, and high net-worth customers.
3. Ensure You Go Through The Prospectus
You should not put all your faith in the company’s prospectus, but you should also never stop pursuing it. Although it may be a dry read, the prospectus which can be requested from the broker responsible for bringing the company public will lay out the subject's set of lists and opportunities, along with a proposed set of uses for the money that is raised through the IPO. For instance, if the money that is being deployed to repay any loans or buy the equity from its founders or any private investors, it may be worth skipping the IPO.
The aforementioned sign is not encouraging to investors. The IPO investment is likely not to be wise as the company may not be able to repay its loans without issuing stock. Generally speaking, money that is going towards the marketing, expansion, and research for the company will paint a detailed picture. Additionally, among the biggest things to keep an eye out for while one reads a company’s prospectus is a future earnings outlook that is overtly positive. Those buying for marketplace success often make mistakes like over-promising and under-delivering, which is why it is crucial to read accounting figures carefully.
The Bottom Line
A company that is successful down the line will start off small but with a lot of potential. The goal with IPO investment today is to be able to sift through the riff-raff and find the needle in the haystack. This is not an easy task. This does not mean that all IPOs need to be avoided. Some investors who buy their stock at the IPOs original price have been rewarded strongly by the companies in question. Keep in mind that when it comes to dealing with the IPO market, skeptical investors who have their fingers on the pulse are much likelier to be rewarded as compared to those who are ill-informed and trusting. IPO investments can be highly lucrative if they are carefully selected. Glancing at the IPO calendar provided by the company before investing would be an added advantage.
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