What are the things to know before investing in IPO?
Posted by aarav badhe on July 21st, 2019
The shares of a private corporation that are offered to the public for the first time is called an initial public offering (IPO). Any investor should completely understand how to buy IPO before getting into investing in IPO. Growing companies which need the capital mostly opt for the IPOs for raising money, while a lot of established firms may use an IPO for allowing their owners to exit some or all of their ownership by selling shares to the public. In the initial public offering, the issuer or company raising capital, brings in underwriting firms or investments banks to help understand the best type of security to issue, offering price or the share amount and time frame for the market offering. It is important to learn about how to invest in share market or IPOs before getting into investing.
Alternative methods for conducting a traditional IPO is direct listing, even if they are easier the alternative formats involve investors taking on more risk. The advantage of the IPO include ease in raising and accessing funds. One of the mistakes an investor makes is to find out how to buy IPO instead of researching and learning about them, having knowledge about the details of the IPO are important for gaining profits. The company that offers their shares is known as the issuer, they do so with the help of investment banks. After IPO, a company’s shares will be traded in the open market. these shares can be further should by investors through secondary market trading.
Some of the things that an investor should know before investing in IPO are listed below:
1. Being cautious:
IPOs have a lot of uncertainty around them, an investor should exercise caution, it is generally because of the lack of information available. Thus, an individual should approach an IPO with caution. Brokers have a habit of savings their IPO allocations for favored clients, unless the investor is a high roller.
2. Waiting for lock-up period to finish:
The lock-up period is a legally binding contract that lasts between 3 to 24 months between the underwriters and insiders of company which prohibits them from selling shares of stock for a specified period.
3. Objective research is a scarce commodity:
Researching about a company is a critical step of understanding how to invest in IPO. Unlike public traded companies, private companies do not have a team of analysts covering them, attempting to uncover the cracks in the corporate armor. Even if the companies try to disclose all the information in their prospectus, it is still written by them.
4. Choosing a company with strong brokers:
Investors should conduct heavy research before going into investing. After understanding how to buy IPO, an investor should consider selecting a company which has a strong underwriter.
5. Going through the prospectus:
Investors should understand the importance of how to buy IPO and reading the prospectus, even if it is a dry read, it is important for the investor as the prospectus includes the risks and opportunities, along with the proposed use for money raised by the IPO.
