What should I know about IPOs?

What should I know about IPOs?

IPOs are initial public offerings of a private company ready to turn public and trade on an exchange, with the scrutiny of shareholders.

IPOs are priced by the investment bank selling them, instead of the supply and demand of the market. Many have heard the term "IPO" (Initial Public Offering), which is the issuance of the first publicly-available shares of a company.

It actually represents the only capital a company will ever raise with its stocks, unless they issue more at another time or if they have issued convertible bonds or warrants. After the IPO, any money made on those shares of stock will be by the buyers and sellers in the market, which is known as the Secondary Market-- the Primary Market is where stocks are issued and purchased directly from the company.

IPO share prices may not always reflect the price that the market would arrive at through supply and demand. It is supposed to be that IPOs are valued just right and then sold at a slight discount of 15% or so, which increases the speed at which they can be sold, but sometimes the underwriters miss the mark.

While a majority of people wanted to get the shares of Facebook, for example, the fiasco of that offering is well-known. The shares went public at $38/share, and four months later were trading for 50% of the initial price.

In other words, those who bought during the first day could have lost up to half of their capital. The share price of an initial offering is arrived at through analysis of the company and the market and is ultimately the product of educated guesswork.

Typically a large investment bank will underwrite the offering and will form a syndicate of other investment companies to take responsibility for selling the shares. They will employ various methods to keep the share price near the IPO price throughout initial trading, but after that, the market forces will direct the price uninhibited.

As with any other investment, we suggest that you look at historical examples, study the articles available here on Tickeron, and consult a financial professional to find out whether or not  IPOs are right for your portfolio. As a general rule, shares of IPOs are suitable only for very aggressive portfolios.

Many seasoned investment professionals never buy companies which just went public and prefer to wait for 3-5 years before even considering such companies for their investment portfolios.