Initial Public Offering Basics For New Investors


A new investor will often hear the phrase Initial Public Offering as he or she is learning the basics of stock market investing. This somewhat complicated investment idea is steeped in the aura of mystery and potential riches. Whether or not initial public offerings make sense for new investors or not is considered in the following paragraphs.

About Initial Public Offerings

An Initial Public Offering, or IPO as it is known by its acronym, refers to a private company’s first time selling of stock to members of the public. Younger and smaller companies commonly issue initial public offerings as they are looking for the money to grow significantly into new areas or new markets. Once in a while, large privately held firms will undergo an IPO in order to become a company that is publicly traded.

In this process of issuing an initial public offering, the firm issuing the stock typically seeks out the help of an underwriting company, such as Morgan Stanley, Goldman Sachs, Barclays, or HSBC. These large advisers have a great amount of experience in taking companies public, and are able to advise the firm in question concerning a number of elements. Among these considerations are whether to issue a common or preferred new security, the optimal timing to bring the issue to the marketplace, and the most appropriate offering price at which to sell it.

Initial Public Offering Basic Considerations

Though Initial Public Offerings are frequently lauded as the best opportunity going in the stock market, this is not always the case by any means. Such IPO’s can often turn out to be a risky form of investment. There are several reasons for this. Making a prediction on what a new stock will do, and how it will trade, on its first day trading and in the sessions following is difficult for any individual to do, be he novice or a seasoned veteran. Precious little available historical data is out there for the person to use in an analysis of the firm undergoing the IPO. Besides this, the majority of Initial Public Offerings prove to be from firms that are experiencing a transitional period of growth. This signifies that they possess an uncertain future, particularly where their new stock’s valuation is concerned.

Examples of Spectacular and Failed Initial Public Offerings to Consider

New investors should consider the volatility in Initial Public Offerings as part of their background information on whether investing in these hot topic stocks is right for them or not. Even wildly successful IPO’s can be extremely volatile. Consider the likes of Home Depot, Wal-Mart, Dell, Disney, Coca-Cola, Microsoft, Starbucks, and Target. There is no doubt that there were some wild fluctuations in prices from when these IPO’s were issued to when these companies became enormous successes. Had a person had the foresight to pick out these companies, and to stick with them in the ups and downs, an enormous amount of money could have been made that would have altered the person’s entire standard of living. One share of Coca-Cola was issued at $40 in the 1919 IPO. The next year, it had plummeted to $19. Had an investor waited out the horrifying drop, and then held on to the share, it would be worth more than $5 million these days, assuming that the dividends had been reinvested year in and year out. Similarly, if an investor had caught on to Wal-Mart on day one and put ten thousand dollars into it, then held on, it would today be worth more than $10 million. This is to say that intelligently picked out IPO investments can change people’s whole lives if they have the ability to pick the winner, ride out the volatility, and also hold on to the stock for many years or even decades.

Just the same, many other IPO’s that seemed like a good idea at the time can fail miserably. WebVan was the web grocer that promised to revolutionize the way people ordered and received their groceries. They are now bankrupt and have cost their IPO buyers all of the money that they put into the investment. The ultimate consideration that a new investor will have to make on whether to get involved in IPO’s or not comes down to how much risk they are willing to endure.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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