IPO investing
Do you want to buy pre-IPO shares, but isn’t your broker offering the ones you want? You’re not alone. These shares often go to big asset managers. Fortunately these days there are also opportunities for private investors to invest in public offerings.
What is an IPO?
IPO stands for Initial Public Offering. It’s an initial issue of shares on the stock exchange. Private companies that go public make new shares publicly available, so retail investors can buy them.
Sometimes you don’t want to wait till the shares of a private company are available at the stock exchange. The difficulties with investing privately in IPOs is that many online brokers prefer to focus on the regular trading than speculating in the IPO market.
How can you buy IPO stocks?
There are however, still several brokers where you can buy an IPO stock. To get them you have to pre-subscribe. Besides that, there are often conditions for buying IPOs, such as minimum investments. For example, Freedom24, a well-known online broker for buying (American) IPO company shares, uses 2000 euros as a minimum.
The chance that you will actually buy stocks for 2000 euros is small, because usually the demand is bigger than the availability. The reason a company likes to oversubsribe is because it stimulates the value of the share on the stock market.
It’s common to have a lock-up period for early investors that invest in an IPO.
It’s good to know that many brokers work with a lock-up periode for IPOs. It means that shareholders are temporarily not allowed to trade the shares on the stock exchange. This period often lasts between 90 and 180 days. During this period shares could be worth a lot more than the offering price, but they can also drop in value. For example, the share of DiDi, the Chinese Uber, was worth 44 percent less than the IPO price after the lock-up period.
Investing in IPOs: pro and cons
Generally when a business wants to issue shares publicly it does well. Besides the fact that an IPO is quite expensive, most businesses only go public when they believe that they can raise a lot of money with it. Usually they use the money to expand, for example to go abroad.
An IPO isn’t always a good investment.
By buying stocks at an early stage, you can get hold of successful stocks for a relatively small amount. However, investing in an IPO is no guarantee for success. There are plenty businesses that were hyped prior to going public, but still had disappointing results. As a investor you can lose a lot of money in a small period of time.
How is the value of new stocks determined?
Before shares are issued on the stock exchange, first there must be determined how many shares will be issued and what their value is. Usually an investment bank sets the initial price of the stock. Because there is (almost) no historical data, the valuation of equity isn’t easy. Therefore it often happens that asset managers are involved in this process.
Besides the fact that the interest can be gauged and a (significant) part can be sold to institutional investors if there is a sufficient interest, it helps to determine the initial price. For instance, if large parties are unwilling to pay the initial price, a company may decide to postpone the IPO.
Tips for buying IPO shares
Before you buy an IPO stock you should read the information carefully. After all, you can only analyze a limited price history. The prospectus, which a company must publish prior to going public, can help you with that. In this document you’ll find the current results, the forecast and potential risks.
The prospectus also describes which parties are involved in the share issue and which companies are interested in the listing. Based on this data, you can determine whether they are safe investments or not. Do you want to benefit quickly from IPOs, than you should follow the sentiment of the IPO carefully.
Points of attention
The return of IPO investments can be (very) high. Some IPO investors see them as a way to get a hold of interesting shares for a relatively small amount of money. Others avoid them because of the risks. Going public isn’t stable or predictable. Therefore IPO trading isn’t recommended for inexperienced investors.
When going public, a company’s share price is hard to predict.
Another point of feedback is that some critics believe that IPO companies are highly priced too often. That’s because the investment banks – which play an important role in going public – receive a commission based on the value of the shares. So critics think they will do everything to get a high(er) market value. You may wonder if that’s true, because it would be difficult for them to bring new companies to the stock exchange if it turns out that they don’t estimate the value in a correct way.
It also happens that there will be a lot of commotion when a company goes public. Sometimes this happens for a good reason, but the fuss can also be caused by the media attention. A lot of companies do that to stimulate the interest for their equity, whether it’s right or not. The reason that investors buy (plenty of) IPO shares is because you can achieve a high return when you are lucky.
Frequently Asked Questions
Some frequently asked questions about buying ipo stock are:
What is an IPO share?
An IPO is an initial issue of shares on the stock exchange. After that, the public can trade. It stands for an Initial Public Offering.
How do I invest in IPO shares?
As a private investor you can buy IPO shares at a broker. Not every broker offers IPO stocks, mostly because they prefer to focus on the regular trading markets. Investing in newly launched shares isn’t recommended for inexperienced investors. The risks are high and the investment can be very unpredictable.
What is a lock-up period?
During a lock-up period – which often lasts between 90 and 180 days – you can’t trade the shares. After the lock-up period the shares can be worth (a lot) more, but then can also be dropped in value.