Have you ever wondered what an IPO is? It sounds like a complicated word, but in fact, it isn't. So inside this article, let's take a look at what an IPO truly is so that next time someone mentions an IPO, you can confidently explain it!
The definition of an Initial Public Offer - Where does the word IPO come from?
IPO by definition in the books means Initial Public Offer. But what does it mean in the language of the average American that didn't study finance at a prestigious university?
In simple words, this is an IPO…
To keep it simple, an Initial Public Offering is basically the process of offering shares of a private corporation to the public in the form of new stock issuance. This allows companies to raise capital from public investors. Usually, it's cheaper and enables the company to raise money faster than through other fund-raising methods.
The history of the Initial Public Offer (IPO)
The term IPO is always wired to Wall Street in the city that never sleeps, New York City. While in reality, the Dutch can be credited for the first modern IPO. They offered shares of the Dutch East India Company. It was the first IPO, and over the years, there were many to come…
How is a company called before it’s IPO?
Any company that is not offering stocks to the public is called private. So a company is called private before its IPO, and afterward, it's a publicly-traded company. As a private company, any business with a relatively small number of shareholders that can include private individuals like the founders, family, and friends, but also professional investors, for example, venture capitalists or angel investors.
What is the notorious unicorn status?
The unicorn status is held by any company that has reached a private valuation of appel. $1B, so basically any company that is worth over 1 Billion USD. However, depending on the valuation strategy, the same company can be rated unicorn status by one professional investor and for another investor to be way under the unicorn status. It's a question about how the investor prioritizes assets, cash flow, market share, and other variables.
An IPO: What was a way to acquire long-term investments is now a rating system for the public that involves the idea, the products, the C-level executives, and others…
When IPOs came up, people and professional investors wanted to know all about the company's assets, its plans for the future and were long-term oriented. Nowadays, it sometimes feels like a rating system with real money, where people place bets about how other investors might like the idea. Investors throw money on the table for stocks they didn't study a lot; they just studied what the media was saying about the company to find out whether or not the price might rise or not.
The idea: If the media is speaking good about the stock, the company, and its IPO, they expect the graph to rise and buy immediately after the opening. Then they study the price all day, and when it hits a certain level, they decide to sell and take home the profits. But because this is the strategy of many investors, the price will be extremely volatile, and it does not represent the intrinsic value of the stock or the company. And that's what makes it dangerous to amateurs but fantastic for professional investors that have more experience and also better technology to maximize their yields.
The upside of IPOs - How can you benefit the most from an IPO?
It's not predictable how a stock will do in its first days at the stock market; however, if the charts go through the roof, returns over +100% in a couple of days are not something completely irregularly. High returns, low prices to buy a stock, and being part of a special moment in the company history can cause someone to take action and buy stocks at the IPO. What is also common is to give your employees stocks after the IPO instead of bonus payments. Through these special incentives, you can keep employees in your organization and make them feel like they own a part of the company instead of just working there.
The downside of an IPO and how to protect yourself from it
Because it's more or less a rating system, the IPO is simply unpredictable. If you can not and do not want to hold the stock long-term, my grandma would tell you to keep your hands away from it. Speculation is only a good idea if you can afford to lose the money or have insider information, as she said. Wise woman. But since insider information is highly illegal, you can never know for sure, and that's why I wouldn't recommend someone to buy stocks without actually being willing to potentially hold them into your portfolio for years.
The profit strategy and how professional investors make their money with IPOs
However, if you know what you are doing and can afford to lose the money or take the good, old "buy and hold" strategy as plan B, you can make a profit by buying right after the opening, observing the stock price until it hits your target price and then selling it. It's speculation, and no one - even Warren Buffett - can predict the exact outcome of an IPO. Speculating is an art itself, and you need the risk-taking character for it. If you don't have it, you should not do it.
Where to Inform about upcoming IPOs to benefit from staying up to date.
At exchange websites, you can find most of the reliable sources of information on upcoming IPOs. One of the most popular is the New York Stock Exchange (NYSE) and NASDAQ. Both provide sections dedicated to IPOs. Another way to find out about upcoming IPOs is Google News and Yahoo Finance. Other than that, there is IPO Monitor, IPO Scoop & Renaissance Capital IPO Center. They all offer details about the company, the stock, and the IPO itself. To get the best overview, you should check all reliable sources to make a profound decision.