An initial public offering (IPO) is when a company offers shares of its stocks to the public, giving up a part of its ownership to stockholders. Although investing in an IPO can be potentially lucrative, it’s also risky, thanks to its volatility.
But, if you decide to take a chance on an IPO, besides keeping your stock papers, bonds, and contracts for your business investments in a flame retardant safety deposit box, here are other tips to consider.
Do Thorough Research About the Startup Company
Getting details about startups set to go public can be challenging since they typically don’t have analysts constantly covering them and attempting to unravel issues in their corporation. Remember that even if most startups offering IPOs try to disclose all details in their prospectus, it’s still written by their people and by an unbiased organization.
So, it’s best to work with what you got and search online for all details you can get, from the company’s financing, previous press releases, and overall industry health. Even if your resources are scant, it’s a crucial step to make to ensure you’re making a wise investment.
Choose a Company Working With Reliable Brokers
Choose a startup with a reliable underwriter since quality brokerages are often associated with top-quality — which you can often find in big investment banks. But they still may make mistakes, but they’re a better choice than smaller brokerages. That’s because these small firms are usually willing to underwrite any organization, meaning even if companies have a bad rep, they’d still work for them.
However, be aware that the largest brokerage companies typically don’t allow the first investments to be IPOs. That’s because most investors putting money on IPOs are high-net-worth individuals.
Wait for Lock-Up Periods to End
The lock-up period pertains to legally binding contracts that last between three months to two years and is made between the underwriters and company insiders, prohibiting investors from selling their shared stocks for a particular period. That’s because this allows you to see if they continue to hold on to the stocks even after the expiration of the lock-up period, indicating the company has a lucrative future ahead.
In essence, let the market do its thing before taking the plunge. After all, a great company is still going to be great and a worthy investment after the lock-up period expires.
Read the Prospectus Carefully
A prospectus is a disclosure agreement describing the financial security of potential investors or buyers. Although you should never place all your faith in this document, you shouldn’t skip perusing it. While it can be a lengthy read, the prospectus, which you can request from the broker of the company you’re interested in, shows the risks, opportunities, and proposed uses for the money raised through IPO investments.
It’s best to avoid ones that say they aim to use the money to buy equity or repay loans and go for those saying that all proceeds will go towards marketing or research. Additionally, it’s wise to avoid a prospectus that’s excessively optimistic about its future earnings as these are often mistakes made by companies competing for marketplace success.
Although IPOs are accessible and anyone can invest in them, unless you have a high-risk tolerance level, investing in an IPO is not recommended since they’re volatile during the first few months of trading. However, if you’re confident about a startup’s success, consider the tips mentioned before investing — ensuring you get a fair deal and huge returns.