ipo-initial-public-offering

What is an IPO?

When you look at all the different investment possibilities out there you might come across the term IPO. What does this mean and is it something you should be interested in?

There are some very good reasons for being interested in investing in this way, while there are also some reasons to be wary and check your facts before putting in any money.

The Basic Facts

IPO stands for Initial Public Offering. This is basically when a company makes its first stock available for the public to buy, in order to raise money. This is often done by a brand new company looking to get started but it could also be an existing firm that has simply never before issued stock in this way. The biggest IPOs can be for many millions of dollars, while smaller ones can be for far more modest amounts. Some famous ones in recent times have been for Google, Facebook and Visa.

The Benefits

This is a way of getting involved in buying into a company right at the start of their life as a public listed company. If you feel that there they are going to have a huge amount of success then you might think that this is a way of getting the stock cheaply. Once the IPO is over and the stock is listed on the open market you could see your investment rise sharply if it becomes sought after among other investors, just as has happened in many cases. The fact that a company offering an IPO will bring out some material explaining their goals and what they plan to use the money raised for is also a bonus. There is no guarantee that what they say is 100% accurate or that things won´t go wrong but you will at least get a glimpse of what they are planning.

The Risks

Of course, there are also risks involved with IPOs that you need to be aware of. For instance, there have been cases in the past of the founders setting up an IPO just to make themselves rich rather than to start up a sustainable long term business. There is also the chance that the new business simply fails to live up to its promises. If it is a cutting edge firm offering something completely new to the market then it is going to be pretty much impossible to know how well it will be received. Additionally, as with any other type of stock the price can rise or fall, depending upon market conditions. Finally, it can be tough for companies to work out what to offer the initial stock at, and it is not until it reaches the open market to be traded that its true value is likely to be revealed. As with everything else in life, there are always going to be success stories and failures, as some stocks go from strength to strength and others lose value.

Summary

Investing in an IPO can be a tricky business, although it can also be a lot of fun. If you do your research and make a smart investment then it can turn out to be a great decision, although there is also the chance that you lose money. It is a risk and for this reason it is often classed as being an investment option mainly for experienced stock market traders. However, as long as you go into it with your eyes open and aware of the risks then it can add a lot of spice to your investments.

Is there a current IPO that you are interested in investing in?

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6 Responses to What is an IPO?

  1. SavvyJames says:

    A nice summary of a phrase many have heard but may might struggle to define.

  2. I usually stay away from IPOs. They have their typical first day run-up and then come crashing back down to Earth the next few days, only to pop back up eventually. Too volatile for me!
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