What You Should Know About IPOs

The September edition of the Business Review USA is now live!

By: Tina Samuels 

In terms of the stock market, many terms go unnoticed by anyone who isn’t into business or investing, but IPO has become more popular recently. This is largely due to major companies going public with their initial public offering (IPO), such as Facebook. If you are still unsure what IPO is or how it affects you, here is some information.

What are IPOs?

An IPO is an initial public offering, or the launch of a company entering the stock market. This is when a company “goes public” and offers their first stock offering on a securities exchange. When this happens, a company officially goes from being a private company to a public company. In general, companies choose to do this so they can earn more capital and have the potential for growing even bigger.  You can either buy a share in the public company, or get it as a stock option if you work for that company or the share is part of compensation.

Why Companies Offer Stock Options

There are two primary reasons a company chooses to go public and begin offering stock options. One reason is because it is less expensive than giving cash or issuing other forms of compensation. They are saving money by offering individuals a share in their company, which can further improve their own assets if the company does well. The other reason is because stock options have more abilities to be controlled. This includes restrictions on when they are eligible to be purchased, transferred or other behaviors of stocks. They are typically offered to management within the company, such as being included in an executive compensation package. It keeps the company from paying high bonuses, and offering stock options in place of them.

What to Look For

If you’re interested in investing in an IPO, there are some things to look out for. First of all, try to invest in a new IPO, otherwise the amount continues to go up for those options. Here are some things to look for and know you’re making a good choice.

History

First is the history of the company. If they have been around less than a year and are already going public, you might want to think twice. It is not uncommon for innovative products and their company to get popular fast, growing at a rapid pace. But stocks for new companies are a big risk. Yes, they could be the next Facebook, but they could also go downhill just as fast as they went up. Included in their history is who their underwriters are and what bank is handling their investments.

Lock-up Agreements

It is not uncommon for new public companies to have a steady rate, then stocks going down rapidly after a few minutes. This is the lock-up period. When employees or investor sign stock options, they are also permitted to sign a lock-up agreement. This is a contract that keeps you from selling or trading stock within this period of time. The stock usually goes back up after this lock-up period.

Flipping

You may also be interested in flipping IPO stocks. This can only be done with a hot stock and is a good way for quick profits. But you should do your research and be completely comfortable with it before continuing with flipping. Flipping involves reselling your stock with the first several days after buying into it, but you have to be aware of stipulations or restrictions of the stock first. If you got it as a stock option from your employer, it isn’t going to be an option for you.

Be Wary of Underwriters

The stock underwriter is essentially trying to make a sale, so don’t fall for their hype and be wary of one attempting to oversell an IPO stock. An IPO only occurs one time for every company, meaning the underwriter really lays on this fact heavily. You shouldn’t buy it just because it’s once in a lifetime for this new company as it won’t always do well.

If you’re new to investing in stocks or IPOs specifically, get advice from an experienced financial advisor. They will help you understand what you’re investing in and the different restrictions of IPO’s.