IPO Investing

By: James Ipos

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Tuesday, 12-Jun-2012 03:13 Email | Share | | Bookmark
Uncovering the IPO

Initial public offerings are that financial phenomenon that everyone knows about but so many know very little about. The IPO has changed the way business raises capital while creating a flare for the dramatic in the financial markets.

An initial public offering is defined as the process whereby a company sells or offers stock for the first time to the general public. This fresh opportunity gives investors a chance to get in on the ground floor of a new investment.

The company is not necessarily new. Often a company will be around for years using private funding. The purpose of the initial offering to the public is to generate a new source of revenue from a broader potential base of capital. However, the initial offering is not necessarily available to all comers. A select group of investors is usually in play, brokered and underwritten in big lots by financial giants in the investment banking industry. Some time after the initial public offering is established, the stock of the company becomes available to the public in the form of individual shares.

Recent news concerning public offerings has centered around Facebook, the most successful social network, with a less than successful offering, as their share price has plummeted since day one. Facebook, like other initial public offerings, generate a lot of sparkle and bang with investors who dream of getting rich quick. The idea is to “flip” the stock, buy it at the offering price, then sell it as quickly as possible once the price rises, assuming it does rise.

Trying to flip an initial offering is akin to gambling due to the high risk associated with a newly listed company on a stock exchange. The company may have a track record of earnings, profitability and good will with the public but it has absolutely no track record with the mass investor. Public perception and swift market dynamics can quickly bankrupt lofty dreams.

Successful initial public offerings have included the new AT&T in 2000, right before the dot com bust, Deutsche Telekom in 1996, the largest initial offering in European history at the time, and Google, one of the most successful IPO’s in history.

The IPO remains an attractive instrument for companies to raise capital. As these offerings become more available to the general public, investors need to be fully aware of the risks and benefits before jumping in with feet.

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Tuesday, 12-Jun-2012 03:12 Email | Share | | Bookmark
Are IPOs a Good Investment?

IPOs have been in the news recently with Facebook’s announcement that it would take its company public. In order to understand what this means, people need to first learn the definition of IPO. The IPO is an Initial Public Offering when a private company offers the sale of its stock to the public. One of the reasons that companies offer their stock to the public is to raise money to expand their operations. This method keeps them from needing to increase the amount of debt they already hold by borrowing more money.

In order to introduce IPOs to the public, private companies need the services of an investment bank. The investment bank is the entity that will determine how much the company is worth. With this amount set, the investment bank can separate it into shares. Then, the price per share can be determined. Half of the shares will be offered to the public while the business owners keep the other 50 percent of the shares. This ensures that they maintain control of their company. After receiving the money from IPOs, companies can expand their operations and, hopefully, their earnings increase as well.

Because the companies that are seeking to expand through taking their businesses public are in a precarious position, investing in an IPO can be risky. These may be newer companies that do not have a long history to point to, and they do not have the data that investors may need to determine if it would be a good choice to purchase the newly released shares. The point of the IPO could be to expand the company and increase profits, but there is no guarantee that this is what will actually happen.

A company that has just recently been discussed for its IPO has been Facebook, and some people are highly disappointed by the transaction. On May 18, trading opened with the stock being placed for sale at $38 per share. Throughout the day, the price rose to $45, but at the end of the day, the stock closed at $31.91. The risk that was spoken of above applies to even well-known companies, such as Facebook. In this case, the stock price was overly inflated. Other complaints have since been lodged against the investment bank, Morgan Stanley that the individual investors were unaware that Facebook’s future earnings were expected to be lower than previously thought. Several lawsuits have already been filed.

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Tuesday, 12-Jun-2012 03:12 Email | Share | | Bookmark
Putting your money on the line with IPOs

Having your money on the line with IPOs can be both exciting and risky. These are businesses that are just now going public, and there is not a lot of information out there about them. There is certainly not as much information as other public companies that have been in the market for some time. This means that you are going to have to take a chance with IPO investing in terms of guessing how well the company will do in the future. If you have a good eye for these kinds of things, then you could stand to make a great amount of money.

IPO investing is all about being able to identify promising companies early. What do these types of companies have in common? Usually a great number of things. For one, they are likely to have products that are innovative and widely desired. If a company is not producing something that everyone wants, how is it going to show increased profits year after year? This is something to look for right off the bat. There are many companies that appear to have great products though. How do you determine which ones are actually going to explode in growth?

Other things you are going to want to look at is exactly how much the company is valued at. The valuation of the company coming to market matters a lot in determining if it is overvalued or undervalued. The amount that a company costs for all of the shares that it has issued is known as its market capitalization. It is a good idea to look at this number in your determinations of if the IPO is at a fair price or not.

Retail investors (or those who are using their own money in small amounts) should be careful with IPO investing. There are many risks associated with this, and if you do not keep up with the story of the company you are investing in you stand a good risk of losing money. You have to know what a fair price is, and what price you can sell your stock for. If you have your money managed by someone else, then you might see if they can get on this for you. Trying to keep up with all of it for yourself would almost be too much to ask of anyone. Do not overextend yourself since you do not have to. Just do what you need to in order to get the right kind of investments, and learn about IPO's as you go.

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