An IPO is a great way to build up your net worth quickly and is an integral part of a profitable investment strategy. But why is investing in an IPO considered aerobatics? Some important points to be aware of are discussed in this article.
IPO: what is the purpose?
When a company starts selling shares on the stock market, it organizes an Initial Public Offering (IPO). As a result, it becomes public, and everyone can invest in it. Companies conduct IPOs to raise additional funds for development from private investors, not through selling a controlling stake or loans. It is a serious step in terms of reputation – any company that has gone through an IPO gains weight in front of potential partners and creditors. In addition, when entering the market, business is automatically assessed, and its transparency is demonstrated. Therefore, listing on the stock exchange is a test of maturity and an essential step in development for most companies.
It is more venture activity, that is, quite risky. It is believed that venture business first appeared in Silicon Valley in the middle of the 20th century – people began to invest in new science and technology and technology companies. The advantage in the direction of IT is observed even now. Of course, IPOs are held in other areas as well. For example, Saudi Aramco, the world’s largest oil company, organized a public offering last year.
What to analyze in an IPO?
It is essential to understand that it is much more challenging to study companies going to IPO than companies with a history. No one knows how startups will behave in an open market and what will happen to them in a year. It will take you long to find information about planned IPOs, weed out less promising projects, find a list of potential investors, and analyze how a company’s listing will affect the industry.
You will also have to evaluate the company’s financial activities and its development plan. In this case, a due diligence procedure is organized with the help of a secure virtual data room.
Where are the guarantees?
These deals are considered complex. But why? The peculiarity of investing at the initial stage is that these are investments in a company that is just entering the stock market, and this likely is one of the lowest prices per share, and then they will only grow.
Guarantees do not exist here – this is the danger and, at the same time, the attractiveness of investing in an IPO. Their profit can be the largest, while the risks are also high. Therefore, one should buy an IPO only according to a well-thought-out strategy (for-profit from another long-term deposit – this is just one of many options). However, there are subtleties – you can apply for the purchase of primary shares only through a broker. Yes, and orienting yourself can be extremely difficult, especially for a beginner. Startups often go to IPOs, and only an experienced investment analyst can assess the prospects of such companies and make a forecast for their shares.
However, despite several shortcomings, which cannot be ignored, the IPO procedure still has its advantages. They include:
- increasing the status of the company
- no debt burden and the possibility of attracting long-term capital
- increasing the level of economic security of business owners, which occurs due to the transfer to the international arena of administrative and political risks and country risks.