IPO 101: What Does IPO Stand For and How Do You Invest in One?

IPOs have been all the rage in the financial world. It seems like it’s a rite of passage for many tech companies like Facebook and most recently Pinterest.

Tech companies aren’t the only companies to raise money through an IPO. Plant-based food producer Beyond Meat had the best IPO in about 20 years. Its stock price shot up 163% over the initial offering price, making early investors in the company very happy.

For investors, there’s a lot to learn about IPOs. For instance, what does IPO stand for and how can you invest in these companies.

Do you want to learn how you can get in on the ground floor of these companies? Read on to learn everything you need to know about IPOs.

What Does IPO Stand For?

Let’s get to the basics, like what does IPO stand for?

IPO means initial public offering. It’s an offering for members of the public to buy stock in companies, which use the funds to grow their businesses. It’s also an opportunity for early investors to cash out on their investments.

An IPO is the first day a company becomes a publicly traded company, though there’s a lot of build-up to get to that point. These IPOs usually appear on stock exchanges like NASDAQ or the New York Stock Exchange.

How do Companies Go Public?

What does it take for a company to offer stock on the major stock exchanges? Since all publicly traded stocks are overseen by the Securities Exchange Commission, there is a process that takes place leading up to the day when the company big-wigs are ringing the opening bell on Wall Street.

Companies with an interest in going public will hire an investment bank. This will be a firm like Goldman Sachs, which will pour over the company financials to make sure it’s a profitable company. The investment bank will also file the paperwork with the SEC throughout the IPO.

The first document that’s filed is the S-1, which is the official notification that a company intends t go public. This is a document that is available for public consumption, that has an in-depth look at the company’s leadership, board members, and financials.

The S-1 will become your best friend when you start to research IPOs that are worthwhile.

After the S-1, company leadership will hit the road, meeting with investors all over the country to get institutional investors excited about the IPO.

The day before a company is due to become public, bankers will set the IPO price, based on the success of the road show. If the market is volatile, bankers may hold off on an initial public offering and wait for smoother sailing.

All IPOs Aren’t Created Equal

Your job as an investor is to make sure that you’re investing in great companies so you can earn a return. You want to find the Amazon.coms or the Beyond Meat type of IPOs.

If you invested $1,000 in Amazon back in 1997 when it first went public, you’d have more than $1 million. That’s a healthy return on investment.

The problem is that not all IPOs are successes. There are some horrific flops throughout the history of IPOs. You can get distracted by a brand name, TV commercials, and media hype and decide to invest in these companies.

How can you figure out the difference between the golden IPOs and the disasters? You need to research and look past the hype to find true gems out there.

How can you tell a good IPO from a bad IPO? Generally speaking, an opening day where the stock price jumps about 15% is seen as a successful IPO.

Researching IPOs in a Few Simple Steps

How can you research IPOs without relying on media hype to tell you that the company’s offering is worthwhile?

The first thing you want to do is take a look at the IPO market. You’ll want to research trends in initial public offerings. Investors tend to ride the ups and downs in IPOs. For example, in 2016, 98 companies raised over $18 billion. That number grew in 2017 and 2018, and it’s expected to slow down in 2019.

That’s the first step in deciding if now is the right time to invest in an IPO. If the IPO market is cooling down, then you can assume that upcoming initial public offerings won’t have a gangbusters debut on the market.

You might be better off waiting a couple of days or weeks for the stocks to drop below IPO price and then buy low. Hopefully, the stock will bounce back above its initial ask price and you can make some money that way.

You also want to read S-1 filings. The SEC keeps all filings available to the public in its online database. You should also check past press releases, and research competitors that have also gone public.

One other item that you can read as part of your research is the prospectus. This will outline the risks and opportunities for investors. There are some companies that will make incredibly promising projections.

You want to read these documents with a healthy dose of skepticism and question everything.

How to Invest in an IPO

How can you get in on the action of an IPO? Remember, companies hire investment bankers to handle the IPO. You’ll want to contact the investment firm to see if you can invest in an IPO.

The larger the investment firm, the less likely they’ll be to allow individual investors to invest on the first day. You are likely going t have to meet certain requirements.

However, a smaller investment firm will welcome individual investors. You also want to be careful with smaller firms as they may not have the experience of larger institutions.

Investing in IPOs the Smart Way

What does IPO stand for? If you’re smart, it’s a way to make money as an investor.

You have to remember that all initial public offerings are not the same. You want to make sure that you do your research to separate the best IPOs from potential failures.

Want to learn more about investing wisely? Check out these five investment ideas for 2019.

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