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What is an Initial Public Offering?

September 15, 2021

What Is an IPO? Initial Public Offering Explained | Investment U

If you’ve heard of an initial public offering (IPO), you have likely heard of them in the context of lucrative investments and major money making opportunities—and at times, this is true. With the rise of the technology sector, the market is seeing more and more companies pursue private funding as startups, then debuting publicly with an IPO once they are more established.

While investing in the right IPO opportunities can be quite beneficial to your portfolio, investing in the wrong ones can be quite risky. Before you jump in, it is important to understand how these IPOs impact the market, investors, and companies so you can be certain you are making the right investment for you.

How an IPO Impacts the Market

When a company has an IPO, it is essentially their debut onto the public stock trading market, such as the New York Stock Exchange or Nasdaq. An IPO presents the first opportunity for the general public to purchase shares, but it is also an opportunity for those who invested in the company early on (such as seed funders and angel investors) to cash out on their investment—which can also lead to major price fluctuations in the first few weeks. To ensure sales despite the uncertainty surrounding performance, an IPO offering will often be discounted when it is first debuted.

How to Make a Smart Investment in a Company’s IPO

Just as with any stock option, it is vital to consider the strength of the company that you are considering investing in at the IPO stage. While companies may be valued extremely highly in the private sector, debuting on the public market requires a much different set of performance indicators—meaning it is quite reasonable to expect there to be some growing pains. However, if you are considering investing in an IPO, there are some questions you can consider to ensure you are making a smart decision:

  • What is the probability that this business’ growth will stagnate and make the share price unjustifiable?
  • What about this business protects it from competition (patents, key employees, etc.)?
  • If the stock falls suddenly after the IPO is completed, will you feel comfortable holding shares so they have a chance to bounce back?

Recommended Due Diligence for an IPO Investment

As with any investment, doing your due diligence before investing in an IPO is a smart decision. Making sure you understand the investment you’re making is vital to being comfortable with the money being spent and can help you get a higher return in the long run. Researching the company, understanding the risks, and talking with a qualified financial advisor can help you be certain that any IPO investment you make is the right one for your particular situation.

If you’d like to learn more about IPOs and how they fit into an overall investment portfolio, we’d love to chat. Get in touch today to learn more about our financial consultation services.