40 things to know before investing in IPO
The primary goal of an IPO is to raise capital for a business for investment and debt reconstruction.
The investment includes buying equipment, software, services, or even acquiring a company. Make sure you analyze a company and know the need for making the company public. If they are raising so less quantity or stack of company, then they believe in the companies future and the ability. This means major stockholders are not willing to give away the equity.
You should also know that company can do a secondary offering for additional funds as their company already went public.
Invest in a company if the valuation is good or a company is having the possibility of oversubscription.
When the valuation is good, then try to hold the company for long time investment. Sell the company stack on the second or third day if you subscribing when the company will be oversubscribed. Sometimes companies give a 100% return on the first 2-3 days of going public.
Companies tend to allow employee equity participation and split their percentage of stock available to a different set of people as they don’t want to lose the company to one big investor who can have the option to control the company in the future.
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Why a company is going public:
To increase the exposure to the public. People believe in the company when the company is available in the stock market because they will liable to even small mistakes. A piece of small bad news can hurt a company when traded publicly. SO company needs to believe in their product and services before going public. If they don’t believe in them, their product and services will be severely scrutinized.
IPO can give a lower cost of capital for equity and debt. This allows the company to grow at a quicker pace. If the company uses the funds to do debt reconstruction, then it will positive for the valuation of the company. Soon the company will report a better number with the capital raised.
Disadvantages of IPO:
Smaller companies will not be going public because the IPO process is expensive, cost of maintenance of books will be high compared to be being private limited.
They have to reveal the numbers to the public, this will help the competitors to know about their price and trade secrets.
Invest in legal, accounting charges.
Founder and majority shareholder can lose their position on the board due to change in the dynamic of stock.
Companies cannot take a huge risk, stock prices fall drastically when they report losses and severely scrutinized publically.
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Terms to be known in the IPO process:
Direct Listing: Company uses its accounting and legal person to perform the procedures to make the company within acceptable limits of regulators. The public will not believe in the accounting process when the company chooses this option.
Dutch Auction: A rare method followed in the stock market. Stock will be allocated based on the bid price and the company will not set the price. Google followed this process in IPO.
Lock-Up: Sometimes insiders in the company tend to overhype the performance and prospect. So insider of the company needs to sign a Lock-up agreement for the stock purchased. This will avoid stock selling at an inflated price.
Waiting period: This is the agreement between banks and companies to wait for selling the stock for a specified period. It is similar to the lock-up.
Lock-Up
If you look at the charts following many IPOs, you’ll notice that after a few months the stock takes a steep downturn. This is often because of the expiration of the lock-up period. When a company goes public, the underwriters make company insiders such as officials and employees sign a lock-up agreement.
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Flipping
Flipping is the process of selling the stocks once the stock price increases drastically on few opening days. After opening, the price will be so volatile and some people trade the overhyped stock trying to flip. Sometimes they tend to predict incorrectly and make huge losses too.
Is it good to buy shares in IPO:
The general answer is No. Buy only if you extremely confident about good valuation (Very rare nowadays) or flip the stock due to overhype among the public.
How to invest in IPO:
This can be done only by using few brokers. Not all brokers allow you to invest in the IPO.
