What the IPO?
Tips for investing in an IPO
What’s an Initial Public Offering?
An Initial Public Offering (IPO) is the first time the stock of a private company is offered to the public. In an IPO new shares of a company are created and are underwritten by an intermediary bank.
What’s a Direct Public Offering? What’s the difference with an IPO?
Direct Public Offerings (DPOs), also known as a direct listings or direct placements, are a way for companies to become publicly traded. The main difference with IPOs is that no new shares are created. Rather, existing, outstanding shares are sold without banks acting as underwriters to the transaction. Through DPOs companies may avoid lockup periods, share dilution and even hefty underwriting fees. On the downside, without an underwriter, there is no safety net to ensure a successful transaction.
Tips for investing in an IPO or DPO:
Pick a company with strong brokers. Although not a guarantee for success, bigger banks are less likely to have bust IPOs due to the impact this may have to their image and reputation. Bigger underwriters also tend to have strong price stabilization fire power through what is known as a Greenshoe option.
DO YOUR RESEARCH: This one may sound obvious, but do your independent research and read the prospectus. It is hard to find public information about some private companies, so contacting people that know the space or use their products is a good way to get valuable insight. Understanding the earnings outlook, use of proceeds, industry and company risks, and the management team is invaluable going forward. Remember that companies filing for an IPO can be smaller, fast-growing companies with inexperienced management and limited operational history.
Double click on Liquidity: Although it may not be an issue for the largest, most popular issuances, it is important to understand how much of the company is being offered and the volume that will be traded. Should the offering be small in size it may be hard to get out if you build a large position. Don’t forget to look for information regarding lock-up periods.
Be skeptical: IPOs are filled with white noise and aggressive marketing efforts from brokers and the issuers. Taking time to understand the issuer is fundamental to the security of your investment. Be cautious of stocks that are pushed too aggressively by brokers and seem overhyped.
Getting in is NOT as easy as it sounds: IPOs are typically saved for special clients and large institutional investors like pension funds and endowments. Your average Joe doesn’t really get a chance to get in at the primary market offering price, and typically buys AFTER the company is sold at the initial price. This typical FOMO sentiment drives prices up and leads to inexperienced investors buying too late at the height of the hype wave.
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Max & Thomas
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