A Further Look at IPOs
An IPO or also known as an initial public offering is when a company sells their stock to the public for the first time. A company can sell their stocks either by equity or debt depending on what the company actually needs.
A company can fall into two categories: public and private. A private company usually has fewer shareholders, and you can expect that the owners won’t disclose a lot of information about their company. Anybody can incorporate a company; it’s as easy as investing some money, filing legal documents and following the set rules and jurisdiction.
Most of the companies that are privately held are a small business, buy you can also see large companies in this category like Domino’s Pizza, Hallmark Cards and IKEA. It can be tough to invest in a private company because owners can choose to sell you any shares or not.
Public companies, however, have sold almost a half of their stocks in both the stock exchange and public. These types of companies usually have thousands of shareholders that follow rules and regulations. They are required to do a financial information report to their shareholders every quarter and should have a board of directors.
One of the focal points in public companies is that they trade and sell their stocks in the open market which makes anyone eligible to buy their shares. In this category, company owners and board of directors do not have the power to stop you from buying any stock in the company.
Selecting the Best IPO to Invest In
If you’re looking for a public company that you can invest your money into, then here are some factors that you should consider:
- History – It’s difficult to analyze and understand a company that doesn’t have that much of historical information. In this case, get a red herring document and examine this carefully. Plus, get to understand the plans of the management team on how they would utilize the money that they would get.
- Understand lock-up periods – Usually, when a company will sell its stocks in the public, underwriters would let employees and officials sign a lock-up period that would last 3 to 24 months. This lock-up period will bind the company from selling any of their stock at the specified duration. When this period ends, everybody is permitted to sell their shares to get back their profit and will result to downward supply.
- Avoid the pressure – Most of the IPO companies would hire an underwriter to promote their stocks. Their role is to make the public know that these are once in a lifetime opportunities. If this happens, don’t just jump in and give your money. A lot of companies usually end up selling below their prices so make sure that the company that you’ll invest into will be a good one.