An IPO is an abbreviation for the term Initial Public Offering. It means that this is when a company first issues its stock to outside investors. An IPO is the only way one would be able to gain public knowledge of the availability of that company’s stock being up for sale. That is unless you knew the owners of the company personally and they had otherwise, unofficially offered you the chance to purchase shares in their company.
It is without a doubt true that a well-chosen IPO can be a great investment. A share bought at a given price, might fetch a lower price the following year or two, but that share, with its dividends reinvested, may earn you hundreds or thousands of dollars. It would be safe to say, your investment will be yielding you high returns. So where’s the catch? Are IPOs truly the best way forward and should one invest in them? One of the appropriate answers to that question lie in the type of company that offered the IPO. Buying into an initial public offering of Coca- Cola or Starbucks is relatively different from that of buying into WebVan or any other company that people barely know.
Wise investors will tell you to stay clear of IPOs. It has become apparent to them that with initial public offerings, companies will be aiming to raise their share capital for business expansion purposes. It is expected, and in some cases guaranteed, that a few years after an IPO, an unpleasant event will occur within the company either resulting from a bad investment, declining sales, spoilt reputation or high cost of operations that will cause the value of that company’s shares to decline. It is then that the value minded investor may make his move and invest in those shares, rather than having bought them at a higher price during the IPO.
The decision to buy into an IPO must satisfy the following criteria; would you be content with owning the shares of that company in the event that let’s say; the stock market closed for decades? If the stock value were to decline by a large amount, would you be able to continue holding on to your business decision as seemingly the long-term potential you had thought possible might be crashing right before your eyes? And what are the competitive moats to which the business’ protection falls under. The answer to these would be a sure guideline on whether to invest or not. The more the negative, the more one would be advised not to.
Any long term business investment minded person can tell you that they keep a daily eye on every trade that is happening on the stock Market. I can assure you the recent IPO from Facebook sent shivers down the spines of many people. It is however a big decision to make, investing in an IPO and it should not be made lightly. Seek financial and stock advise from expects who are professionals at business forecast, then sit down and make your decision.