Many people are watchful as companies begin to go public. Even in a time when the economy is down, this can be seen as a way to get in on the ground floor of a great money making opportunity. IPO investing is tricky and can be a financial gold mine for those who know how to make the right judgments through the process. IPO is the initial public offering of stock for a private company that is trying to raise money by offering to sell stock on the open market.
Make sure to do the research before making investments. All companies are required to provide a prospectus. This is a document that provides financial information as well as forward looking statements. The company puts this together to provide potential investors with information to help them make the decision on whether or not to purchase stock.
Initial offerings are typically controlled based on price and amount of original investment. This is a way for the company to try and reach their goals in the first sale. Often, larger sales require a minimum investment to prevent millions of initial sales. When this happens, many smaller investors are left out of the original round. The price can be driven up as the stock begins to be sold in smaller lots.
The product and market are critical in making the investment decision. Many IPOs are in the news because they are for huge or well-known companies. Many smaller companies go through this process as well. In all cases, understanding the product and the market for this product will help you develop an understanding of the future of the company.
Learn what the original investors are planning with their stock. Some investors may use the IPO as a way to get their original investment back. The founders usually will sell some, but hold on to the majority because they believe in the company and its potential. If the founders are getting rid of all of their ownership, this may be a cause for concern.
There are two types of underwriting that explain the backing bank’s assumptions. If the bank that is backing the IPO is operating under a firm commitment, they are guaranteeing that the sale will reach a certain level or they will purchase stock to make up the difference. If they do not feel the company is a great investment, they may operate a best effort sale where they do not have to make the commitment to buy the remaining stock.
Determine the reason for your interest. Some investors for the initial offering are looking to make money by buying fast and selling just as fast. Often the first day will see the price jump high, and then begin to level out. Other investors truly believe in the company and are planning to hold the stock to develop dividends or sell later when the company as built a stronger financial foundation.
IPO investing can be a very profitable venture if the homework is done. Making sure you are aware of the founders’ intentions, the banks backing, and have read the prospectus are all necessary before deciding to invest in any company. With these understandings, you will be much better equipped to make a profit through this type of activity.
If you are aware of the markets and new technology, IPO investing can be rewarding and profitable. For more information on how to become involved, check out the the article at SF Gate right now!
source:http://www.howtoinvesttoday.com/2011/06/25/making-a-profit-with-ipo-investing/
