In the world of investing, the term IPO gets tossed around quite often. Those letters stand for Initial Public Offering. It basically means that a company is offering shares of its stock to the public for the first time. This is why the term IPO is often used when talking about a company that is ‘going public.’
Private vs. Public Companies
The basic definition between the two is centered on who owns the shares of stock. In a private company, the owners do not have to sell their shares to anyone who asks. When a company goes public, they provide a certain number of shares to be purchased by anyone willing to invest. Public companies use an IPO as a time to generate cash, which can be a better alternative to borrowing in many cases.
A company might have an IPO to raise money for expansion, debt reduction, or other general growth reasons. If a company is privately held, they might consider going public if the owners want to release their control and make a nice profit from the sale of stocks.
Another benefit of going public is the free publicity that comes with it. With social media and mainstream news covering the financial area closely today, there’s a good chance that you’ll be the top story for a day or two. Who doesn’t like free press?
Should You Invest in an IPO?
The biggest concern with investing in an IPO is that the firm probably has a relatively short history behind its books. If you don’t have a good grasp on how a company is valued, you might be buying into a company that is overvalued and add much more risk to your portfolio.
The hype behind an IPO might lead investors to pursue a stock that they don’t understand fully. Your reason to invest should be founded on the fact that it’s an exciting IPO – it should be based on the soundness of the company.
Finding an IPO
If you want to stay up to date on the newest information about companies going public, you can view an IPO showcase on the New York Stock Exchange’s website.
Here’s the link to view the most recent IPOs.
I don’t know if I’ll be purchasing any stock for any upcoming IPOs, but it’s definitely interesting to know where I can look for the newest offerings.
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{ 4 comments… read them below or add one }
Nice info. I don’t think I’ll be investing in IPO’s anytime soon either.
I respect Ben Graham and The Intelligent Investor, and he writes about the risks of investing in new companies.
Sure, there are the occasional superstars, such as Apple. But for every Apple, there’s also an Enron.
Just not my cup of tea. I’d rather see a history of sound performance in a company before investing.
Thanks Darren! I agree – having historical data helps in valuating whether a stock is a good buy or not. I don’t think I’ll be investing in an IPO soon either!
Another issues with investing in an IPO is the fact that most of the money to be made off the hype and release of a new company is made by big institutional investors that can get the stock before it is released to the public. This makes it impossible for the small time investor to get in at a good time to notice any upside. IPO’s are more about the interesting story, and not about finding a good investment.
I think some companies are worthwhile to give a shot at the IPO. IE Google back in the day. But just allocate a small amount so it doesn’t make or break your portfolio or account.