How to Choose IPO – Strategies for Successful Investment

Initial Public Offerings (IPOs) hold a certain thrill in the ever-moving world of finance and business. IPOs signal the change from privately held to publicly traded companies, opening the treasury for investors to buy from the start. There is always a possibility of many multiples of your IPO investment return during an IPO. But not every investment in an IPO is the same outcome.

At Moneyplantfx, we want to describe IPOs by discussing what IPOs are, types of IPOs, the benefits and drawbacks to IPOs, as well as some strategies that you can use to make smart investment decisions. We think by the end of this you will also have clarity on some key terms used with IPOs, which will help you feel more confident in moving forward in this exciting, but complicated market space.

IPO Definition

An Initial Public Offering, or IPO, is a type of share launch in which a company sells its shares to institutional and retail investors simultaneously. Typically, a forthcoming IPO is underwritten by one or more Investment Banks, and publicly listed the shares on reputable stock exchanges.

The rationale for IPO investment is that companies utilize an IPO to raise capital for expansion, diversification, mergers and acquisitions, research and development, or to open new locations. For investors, IPOs are an opportunity to purchase shares at an attractive valuation early, with potentially high returns once the stock is publicly traded.

IPO types

There are primarily two IPO types:

1. Fixed Price Issue

In this type of issue, the company prescribes the fixed price at which shares are issued. Investors are aware of the price of the shares, before they subscribe, meaning that there is more certainty, and less ability to discover price based on market forces.

2. Book Building Issue 

In this type of issue, the company does not prescribe a single price, but it prescribes a price band with a floor price (the low) and a cap price (the high). Investors place bids in the range, and the price is set after the bid, allowing the share value to be market discovered.

Benefits of Investing in IPOs

• Early Stage – An IPO investment provides the opportunity of investing when a company is in its early stages of high-growth potential and may result in a potential increase in value.

• Diversification – IPO investment  can improve your portfolio’s exposure across industries and sectors.

• Liquidity – Stocks available from an IPO are listed on a stock exchange and can be bought and sold, offering a great deal of liquidity.

Disadvantages of Investing in IPOs 

• Risk of Loss – IPO investment  can be very volatile and many times the value of the stock may fall below the issue price.

• Little Information – Typically companies have very little long-term financial history, and it can be difficult to analyze business results.

• Hype – Certain IPOs can receive a tremendous amount of media coverage, which can inflate definitions of the actual value of an IPO.

• Information Disparity – There can be a gap of information when it comes to IPO investment . There is a chance that institutional investors can have more information (and later make the retail investor regret their decision).

Approaches for Successful IPO Investment

To achieve the greatest positive returns and the lowest risk, we suggest the following successful approaches:

1. Thorough Research – Conduct research on the company’s financials, business model, competitive environment, and other important factors before investing any money.

2. Industry Analysis – Analyze the industry’s growth and regulation to determine long-term viability.

3. Management Assessment – A company with a good leader tends to be an indicator of a company that has more potential for success; evaluate the experiences of the management team to see if they have relevant backgrounds.

4. Prospectus Evaluation – Review the prospects for any risk factors, intended use of funds and amounts, and financial information.

5. Valuation Assessment – Review the company’s offering price and compare with other similar company prices.

6. Market Context – Favorable economic conditions lend themselves to positive investor enthusiasm for larger offerings.

7. Diversification – Make sure you do not put all your money into one offering; be sure you invest into various sectors.

8. Entry and Exit Strategies – Make sure you set clear entry points and exit goals. You might also consider stop-loss orders to limit your possible losses.

9. Continuous Updating – Stay informed on company announcements, industry news & trends, and others to enhance your strategy.

At Moneyplantfx, we prefer when investors have disciplined IPO investing approaches that are research-driven and not momentum or hype driven.

IPO Investing Key Terminology

• IPO Price – The initial price that shares are offered to the market.

• Underwriter – Financial institutions and/or investment banks involved in the issuance of the IPO.

• Market Capitalization – The price of a company’s outstanding shares, calculated by the IPO price, times the number of shares.

• Lock Up Period – a fixed time period that a company insiders are restricted from selling their shares.

• Quiet Period – The time after an IPO where companies may not make forward-looking statements.

• Stabilization – Actions by the underwriters to prevent market prices from dropping below the issue price.

Final Thoughts

Through IPO Investment in later stages of companies can be valuable if you have the know-how and discipline to be practical. While the benefits of buying early, diversification, and liquidity are enticing, the risks of volatility, speculation, and too little data have to be balanced with this desire to invest in exciting companies losing the comfort of history. Remembering to do the research and look for valuations where you’re not in great speculation, while investing in your own diversifying your overall wealth on a regular basis, is a good way of being sensible and not just racing toward the next publicly traded, shiny object.

At Moneyplantfx, we believe in following some sound IPO investment strategies and with the right tools like a demat account opening, investors have a chance to invest along the growth journeys of its next promise, while also protecting over time their net wealth.

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