Things to Consider When Looking at IPOs

Secondary offering

The initial public offering (IPO) is a relatively new term. It entered the public vernacular in the mid to late 1990s. One good way to look at IPOs is to evaluate the overall state of the market. IPOs tend to do better when the market is doing better. The IPO review is an important part of deciding to invest in one. Here are some tips for investing in an IPO company.

You will have to do more research on your own.

There is often not much IPO information in terms of performance. Because an IPO is just going public, there is not as much data on how it is doing. Public companies undergo a lot of scrutiny from hoards of analysts. Private companies, who do not have to make a lot of their data open to the public, do not have to deal with this. As a consequence, it can be hard to find third party analysis of the company.

What can you do? You will need to conduct your own IPO review. Look for press releases, read the full prospectus, investigate the company’s finances and competitors. You can research the industry the IPO company is in and how that is doing.

Read every word of the prospectus.

These are produced by the IPO firms but they can give you valuable information, even if it is not complete. When you are doing your IPO review, you would be ill served if someone suggested you skip this important step. The company uses this as a chance to explain their plans including the risks and opportunities they face. This will include what the company plans to use the money from the IPO for. If they are going to use those funds to pay off debt, this should be a big red flag for you. This is not a good sign. Companies who plan to use the money they raise for marketing, research or moving into new areas and markets are much safer investment. You should also be wary of overly optimistic views of their earning potential. You should read the prospectus after you have researched the industry so you can judge the projections more objectively.

Look at the brokers.

When looking for an IPO to invest in, you put yourself in a better position if the company in question has a good underwriter. This is not a slam dunk nor will it be a guarantee, there are none of those in the world of investing, Companies that have larger brokerages are safer bets than those who have smaller ones. Bigger brokerage firms can be more selective so the firms they pick may be stronger. The downside is that if this is your first investment, you may have trouble making it an in an IPO if the company has a large brokerage firm behind it. Many of the larger firms do not allow individuals to make their first investment with an IPO, something that smaller firms do not care as much about.

Can you wait for the lock-up period to be over?

Most IPOs have what is called a “lock-up” period. This is a period of time ranging from three to 24 months when the underwriters and insiders for that company are not allowed to sell their stock. If these people hold on to their stock when they are legally allowed to sell it, that shows a company that is going to do well. When all of the underwriters and company insiders jump ship, this is not a place you want to put your money.

Caution is the word of the day.

When it comes to investing in IPOs, even a thorough IPO review may not yield enough information to make your decision and you may have to look to your gut. As you have discovered, IPO data can be scarce and being skeptical of what you read in the prospectus makes a lot of sense. This is not to say you should not invest in an IPO, you just should be more careful with these investments.

All investments have a certain amount of risk and you need to know how much you are willing to deal with. IPOs can offer great rewards and profits. Do your due diligence to make the right decision.


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