Investing in IPO can make you a millionaire in the long run. Before investing in IPO, you must know about the company and how IPO works. In this article, we will talk all about IPO (Initial Public Offer).
Being an Investor is not an easy thing at all.
It is certainly not a child’s play.
But there are lots of people out there who do not think along the same lines.
You will easily find many people who consider Investment as equivalent to putting or rather throwing the money blindly in some stock and then strongly expecting a good return out of their invested money.
How would you rate this approach of Investing?
As Excellent, Very Good, Good, Average, Bad or Worse.
Well, in my opinion, this approach is worse or rather silly.
In the first place, there is nothing wrong in taking on the shoes of an Investor. Every citizen has an equal right and opportunity to become rich. And Investing is one of the best ways of becoming rich.
But you ought to Invest in a Right Way. You need to invest in a proper fashion and that too after thoroughly analyzing the risks and other factors associated with the Investment option in which you want to invest and grow your money.
It is as simple and as difficult as that.
Simple if you adhere to this approach and invest in a conservative way and difficult if you continue investing blindly without analyzing the market and economic conditions.
This is one of the Golden Principles of Investment if you want to gain from being an Investor.
The same holds true even for Investing in IPO, Initial Public Offering, as it is correctly known as.
What is IPO (Initial Public Offer)?
Well as you would know, an IPO comprises the first sale of stocks by a company to the public. It is referred as a public offering. A company tends to raise money by issuing IPO. When a company issues equities to the public to raise the required capital, it is known as an IPO.
With IPO, a private company offers its stocks to the public for the first time. Usually, IPOs are issued by small and young companies which wish to seek capital for expansion. However, large private companies also float IPOs for becoming publicly traded.
At the time of launching an IPO, the issuer or the company obtains the assistance of an underwriting firm which goes on to determine the type of security to issue, some shares to be issued, the best offering price, and the time for issuing the IPO.
With an IPO, a company intends to raise the much-needed capital which is required for modernization, expansion, increasing production, or for furthering the marketing goals. It is the first time that a company is approaching the public for money.
IPOs dilute the equity holdings of founders and investors and bring in public investors. It also boosts the corporate image of the company as it helps to gain the confidence of public investors.
Benefits of Investing in IPO
A company issues IPO for the public investors. When the public buys the shares, it is listed on the Stock Exchange. Usually, IPOs are once in a while affair. It is done when a company wants to list its shares on the stock exchange and goes public.
People who buy IPOs get rewarded by the company in the form of dividends or when they go on to sell the shares as the share prices rise. Usually, the IPOs are offered at low prices which make them lucrative for public investors.
IPOs are bought directly from the companies which issue them for the public. Mostly, the IPOs are issued at a cheaper rate. So, they hold a lot of profit for the investors. When the IPOs are listed on the Stock Exchange, they usually get listed at a premium, meaning at a price which is higher at which they were issued.
Usually, investors can make a lot of profit by selling these shares (which are listed at a premium price on the Stock Exchange). Sometimes the profit can be as high as 100%. Once these shares are listed, investors can sell them in the market and pocket the gains.
It can also happen that companies which are offering IPOs at a low price go on to become very successful. It means higher share prices and lots of profit for investors. It means a lot of value in holding the IPOs for a long period.
So, IPOs offer investors the chance to participate in a company’s prosperity cheaply. IPOs tend to perform as a good means of long-term investment resource for investors.
How do you buy stock during an IPO?
The process of buying IPOs is really simple.
Usually, IPOs are heavily advertised in the media.
However, you should read the prospectus for the issue before going to apply for IPOs. These documents carry plenty of information about the company coming with an IPO.
Usually, it contains information about the company’s financials, its management, its track record, its future goals, and what it plans to do with the money that is being raised through the IPOs.
It’s free and is easily available on the company’s website.
Pick up the application form which is readily available at any broker’s office. Fill up the application form and write a cheque you want to apply for. There is a minimum number of shares that you must apply for which is clearly specified in the application.
Submit the IPO form (along with the cheque) within the time frame specified to the collecting bankers or the collecting agents for the merchant bankers to the issue. Nowadays, you can even apply to IPOs online. For this, you need to have a trading account with online brokerage firms.
A Word of Caution – What you should keep in Mind before buying IPOs
Yes, Investing in IPO demands a discipline of proper study before investing in any IPO. You need to do a good amount of study of the company of which you are buying the stocks through an IPO.
You need to know the company’s business model, the people who are responsible for running the affairs of the company, how far it is sustainable, and its financial foundation. You even need to know its technological aspect and also the demand and popularity of its product and services and also its future expansion and diversification plans (if any) before deciding to invest in a particular IPO.
Another important point you need to remember about Investing in IPO is that it should only be taken up if you believe and follow a long-term investment approach.
To make my point more clear, I will put before you some related examples.
Consider the companies of the likes of Coca-Cola, Wal-Mart, Dell, Microsoft, Walt Disney, and Home Depot.
All these companies have one thing in common.
All of the above companies came up with IPOs, witnessed volatile price fluctuations along the way but survived the tough times due to their sustainable business model and now offer dividends to their investors which are worth millions.
For example, a single share of Coco-Cola purchased at the IPO for $40 in 1919 is now worth over $5 million. But it also witnessed such challenging times when it crashed to prices as low as $19 only.
So, you should be confident in the business model and strategy of the company of which you want to purchase the IPO.
And most importantly be patient enough not to sell the IPO which you had purchased when the stock market goes through a hiccup or turmoil.
Ideally, if you had your homework done on the details of the company, you can then buy the IPOs of that company and put them in your safety vault for a long term, say five, ten or twenty years or so.
Yes, a well researched and carefully chosen IPO Investment (decision) can surely turn out to be a life-changing one.
Truly Investing in IPO is not at all easy if you want to gain and make a big profit from your Investment. As we have seen, it requires a proper study of the company and other market conditions as well.
Investing in IPO can only be profitable if you can stick with the stock certificates for a long period.
So, Investing in IPO is right for those people who are willing to devote their time to research and analysis and willing to be patient for at least 2-5 years. Of course, Risk of Investment would always be there, and that cannot be ruled out under any circumstances whatsoever.
IPOs offers you the opportunity of buying cheap and participating in the company’s prosperity as it grows along in the coming years.