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Investing in IPOs: Your Questions Answered

If I had a dollar for every time someone told me that they wished they bought Apple, Facebook, Google, or Amazon stock when the now billion, and even trillion, dollar companies first went public, I wouldn’t need to fantasize about making it big by playing the stock market, just like them. I’d have enough money for all of us.

Of course, it’s easier to retroactively predict (!) a stock’s performance than it is to make the right buy when a company makes its debut on an exchange. And, as you know, dozens of companies go public every week. Some of them will never make it big, but some may see success. If the excitement of Initial Public Offerings (IPOs) allures you, take a look at what you need to know before investing in a newly public company.

Can any company go public?

Yes, but it isn’t easy. A company has to hit a certain amount of earnings before the IPO – around $10 million in a three year period. Then, the company will choose an investment banker to assist with the process.

The investment banker acts as an underwriter and assists in the entire process, whether its hiring lawyers, management, auditors, and other staff, and get enough backing for the IPO. Then, the company has to submit to SEC guidelines and hold shareholder meetings. It’s an arduous, and expensive process for the company. While any company has the potential to go public, only a select few are able to do so.

What’s in a new stock price?

Both the underwriter/investment banker and the investors determine the IPO price. This is where, as an individual investor, you have to be careful. Sometimes, the prices are under or overvalued – by a lot.

Aggressive investors may pounce on a potentially undervalued stock, hoping to reap the benefits. More cautious investors may wait months after an IPO to feel the true stock price out and buy and sell from there. Go with the investing style and budget that makes sense for you.

Before you decide to buy or hold off, It definitely doesn’t hurt do some research on the company too. Look up its founder, track record, industry outlook, competition, and more before you decide to invest.

How do I find out about and invest in IPOs?

It’s an easy as a quick Google search to find out about new IPOs. They pop up pretty frequently.

And, depending on your brokerage, you may have certain limits if you want to invest in an IPO. Account minimums, age of your account, and other factors may be at play and hold you back or allow you to invest in a new IPO.

While it may seem exciting to invest in an IPO, it does take work, research, and lots of cash. It’s not as easy as buying Apple stock in 1980 and getting rich, so make sure to take the necessary precautions. 

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