There’s always excitement generated when a seemingly successful business venture announces it is going through an initial public offering, or IPO. Think of Facebook and Google. It would seem that an IPO is an excellent channel for the individual investor to get in on the ground floor of a money-making factory. Well, that’s not necessarily the case.
What is an IPO?
An IPO is just what the name implies: the first time a company offers shares to the public. The public however usually has to go through institutional investors and underwriters first. They work with the company to structure their IPO, ensuring that it meets regulatory requirements and scrutiny. Depending on the exchange on which it is being offered, these can be onerous.
So why IPO? To raise money and possibly to also raise the company’s profile. By passing muster for the IPO, there’s a sense of legitimacy given to the company that could help it on both fronts. Investors may be more likely to buy stocks on the open market after the IPO and perhaps buy the products or services.
Although IPO shares are usually offered mainly to institutional investors, there are often portions set aside for retail investors who are customers of the underwriters. Also, some individual investors believe that owning stock in a company means they have a modicum of control or interest in the company’s operations. This is not necessarily so. There are now dual-class share structures which allows one level of shares to have more voting rights than the other. And allows for different dividend structures as well.
Are IPOs all just a rigged game?
While the concept of IPOs seems simple enough, the process can be complex and opaque. Especially for retail investors who are unfamiliar with the underwriting process and who may get swept up by exuberance rather than by careful analysis.
“Not every company should go public, no matter how successful they are in the public eye,” explains Richard. “There’s a lot of evaluation that needs to be done to determine if an upcoming IPO is worthwhile.”
If you want to learn more about IPOs in general or have one in mind you’d like to invest in, you should consult with a trusted financial expert, like Richard, first.
