An Initial Public Offering is when a privately-held company introduces its shares to the public for the first time through equity markets. Generally, private companies go public to acquire funds for development.
The real question is whether or not it is worth jumping in when a new stock hits the market for the first time.
Evaluating Company’s Growth Potential Is Difficult
Obviously, when a highly-anticipated privately-help company goes public, it generates a lot of attention and excitement among investors. Although for retail investors, evaluating the company’s growth potential is almost impossible to do, especially with the lack of access to the company’s information.
In most cases, when a company intends to go public, it employs an underwriter, frequently a high-profile investment bank. An underwriter ensures that the target amount of funds the company wishes to raise is met by purchasing all the shares available and reselling it to the public.
There is also another route, which is Direct Listing. This process allows companies to go public without employing an underwriter. It saves the company millions of dollars in fees, but it puts the stocks in a more vulnerable position.
Investors can purchase at the offering price, which is predetermined by the underwriter. More often than not, obtaining access to the initial price is almost impossible and the advertised price is highly unlikely what a retail investor will pay.
Performance Is Unstable At First
In reference to a chart comparing the stock’s first public market price in 2018 and 2019 that is released Investing, IPOs seemed to have prospered better last year than this year. However, we’re still on an early period of the year to give a conclusive verdict for 2019 IPOs.
Ultimately, deciding whether or not to jump in on an IPO is entirely up to an investor. It’s evident, however, that the dangers exceed the dull performance over the short-term. But fortunately, the good news is that more information will be accessible and true price discovery will eventually take place. And when that happens, everyone would be able to make wiser decisions.