Initial public offerings have long been the domain of the wealthy and institutional investors, but the Internet is starting to level the playing field. Now more than ever, IPOs are accessible to regular investors who may not have hundreds of thousands of dollars to invest.
While the rewards from an IPO can be fruitful long term—one only has to look to Amazon, Apple, and Google as examples—the road is also littered with those that flamed out once they started trading as public companies.
The risks associated with this type of investing can be huge, but so is the potential payoff which is why knowledge is king. From knowing the Underwriters to pouring over the prospectus, newbies need to engage in a lot of due diligence before jumping into the IPO market.
Consider The Underwriter
When a privately held company is gearing up to sell shares to the public it typically taps Investment Banks to underwrite the IPO or sell the shares on its behalf. Underwriting an IPO can be very profitable for the banks which is why competition can be fierce. It’s not a guarantee but an Underwriter that’s engaged in many IPOs over many years with a good track record, is more likely to have a successful offering than a novice Investment Bank that isn’t an experienced IPO Underwriter.
Look At The Industry
When a privately held company decides to go public it can be driven by strong growth prospects or is operating in an industry that is poised to grow rather than shrink. Rewind to the heady days of the Internet boom when a slew of companies were listed on the stock market largely because the Web was in the early stages and the potential to grow was there. But that isn’t always the case, which is why new IPO investors have to put on their analysts hats and figure out if the company, once public, will have staying power. Some of the characteristics of fast growing companies include good cash positions, revenue and earnings growth, a focus on innovating and investing in research and development, a strong brand or profile and a loyal and increasing base of customers.
Pour Over The Prospectus
Companies gearing up to go public are required to file a prospectus with the Securities and Exchange Commission. And while investors shouldn’t put all their faith into what a firm says in its SEC filing, it’s also shouldn’t be ignored. Sure it can be dry and lengthy but it lays out the risks and opportunities the company faces. For instance a the prospectus will disclose why the issuer is raising capital. If proceeds of the offering are to be used to pay down debt, for example, it could raise red flags. But if the proceeds from the IPO are going to fund expansion or hire more employees, then it could be a sign that the business is growing. Pay attention to the management discussion and analysis section of the IPO prospectus as well. There you’ll find an overview of the operations and how the company is doing from management’s perspective.
Know How To Get Access
Knowledge is key but it won’t mean much if you can’t invest in an IPO. Rewind several years and nearly the only way an individual investor could invest in a company going public was to have a relationship with the Investment Banks underwriting the offering. That often meant you had to have substantial investable assets to even have an account opened. These days, with the advent of online investing and a democratizing of the investment markets, thanks to the slew of fintech startups, regular everyday investors have a few more options.
For starters, a handful of online brokerage firms now provide access to IPO investing for their clients. The type of IPO and the number of shares you can purchase may be limited, but it is a way to gain access. Another option is to open up an account with one of the Investment Banks that underwrite IPOs. In this case you may have to maintain a sizeable account balance and engage in a set number of trades to be eligible for an IPO. Investors can also purchase an IPO ETF (exchange traded fund), which is like a mutual fund that invests in IPOs.
Of course, ClickIPO is another access point – a straightforward and simple way of discovering and investing in IPOs using a supported brokerage account. There are no account or trading minimums, and the platform is designed to attract investors willing to hold IPO shares for at least 30 days (Secondaries for 15 days). For IPO flippers, this is 29 days too long, so the ClickIPO platform is really designed for buy-and-hold investors, not very short-term traders.
Before placing an order for shares of an IPO, remember to consider the long-term prospects of the issuing company and be mindful that allocations are never guaranteed. This means that you can place an order for 100 shares and you may receive all of it, but there is a chance that you only receive part of your 100 share order or none, if the offering is very popular and becomes over-subscribed.
Risk of Investing in Initial Public Offerings (“IPOs”)
There are specific risks in investing in an Initial Public Offering (“IPO”). Among other things, the stock has not been subject to market valuation. Those risks are described at length in the prospectus, and we urge you to read the prospectus carefully to understand those risks before investing. An IPO is the first sale of stock by a private company to the public and may not be suitable for all investors. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. IPOs are a risky investment. For even experienced investors, it can be difficult to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values. Read more information regarding the significant risks associated with investing in IPOs.