How Can You Profit From an IPO?

How can you profit from an IPO?
How can you profit from an IPO?
An IPO can be a challenging but a rewarding investment.

How can you profit from an IPO? An IPO can present an opportunity for an investor to make huge returns. But you could also see a huge loss. Sifting through the sea of IPO offerings can be daunting. Here are a few tips to help you pick a wining investment.

What is an IPO?

An Initial Public Offering , or IPO, is the transition of a company going from private to public for the first time. Shares of stock will be offered to a broad range of investors allowing a company to raise considerable capital. This gives a company a greater opportunity to continue growing and expanding.

A company must meet certain criteria set by the SEC to be granted an IPO. Both the share price and the number of shares offered will be determined by an underwriting process.

Many times, when a company goes public the early private investors and company founders will cash out and realize the gains in their original investment in the company.

Qualifying to Invest in an IPO

Unfortunately, investing in an IPO is not as easy as simply buying stock in a new public company. You will have to first register with a brokerage firm and will have to have to meet certain criteria. Many firms will require that you have a certain amount of money or a certain amount of transactions with them before they will qualify you.

Once approved you can direct your broker to alert you to upcoming IPO offerings that may interest you.

Tips to Profit from an IPO

First, like any investment, you will want to do your research before investing in an IPO. Unfortunately, finding information on a private company can prove to be difficult. There won’t be much information for you to find, and what you do find will be biased, as it was probably written by the company itself.

Do as much searching and researching as you possibly can. Look online, search jobsites for employee reviews, look for press releases. Any information that you can find will help you make a sound investment decision.

Even though the prospectus could be biased and incomplete, you will still want to read it. Look for red flags such as excessive debt, mismanaged funds, a company vision or direction that you may not agree with, or an overly optimistic sales growth forecast. Anything that doesn’t sit right could mean that you will want to pass on that particular company.

Approach with caution. As stated earlier, good intel can be hard to come by. Don’t bet the farm on something that could cost you your nest egg. Also keep in mind that the average investor probably won’t have access to the best IPO offerings. Brokerage firms will often offer the best IPOs to preferred clients and high net worth investors. You may end up with the leftovers that no one else wanted.

Lock Up Period

The lock up period is a time window when investors are not allowed to sell shares of a particular investment. When speaking about an IPO, the lock up period is between 3 and 24 months.

During this period share prices could be overvalued. Once the period ends you might see mass selling as the insiders try to cash in on their investment before share prices fall. If, however, prices hold steady, then it could indicate that the company was not in fact overvalued. This could signal a good company to invest in. Simply waiting for the lock up period to end could be a winning strategy to picking a quality IPO.

Wrapping Up

How can you profit from an IPO? The bottom line is that it is not easy for the average investor. Barriers to entry are high, information is hard to come by, and the average person is often locked out of the best IPO offerings. But you can make money on these investments if you do your research and are patient enough to wait for a quality company to come along. As always, don’t invest more than you can afford to lose, and don’t invest in things that you don’t fully understand.

Read Also:

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Research Before You Take a Chance: 7 IPO Investment Tips for the Most Profit

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