When a company begins trading in the financial markets for the first time, there is often a sense of excitement in the investment community surrounding the initial public offering (IPO). Not all IPO investments are winners, however, and investors may need to exhibit some discipline and discretion before making any decisions. The best IPO investments are those companies that are fundamentally solid, have profits or a plan and a time horizon to reach profitability, and are coming to market at a time when the markets are strong.
You want to select IPO investments based on the prospects for profits going forward. Sometimes, companies in an emerging sector or technology may come into cash quickly. This may be a result of a short-term government spending plan or government incentive of some kind. While this may benefit the company in the short term, it does not mean the company will make a solid, long-term investment. Understanding what a company's profit picture looks like in addition to the reasons or generators behind those sales will help in making sound IPO investments.
It can be difficult for the average investor, or small investors, to participate in IPOs. Shares of a new issue are often in high demand because of the likely positive sentiment surrounding an IPO. Worse, a company only issues a certain number of shares into the public markets, making it more difficult for investors to lay hold of them. Institutional investors often have the first shot at buying shares because these firms invest the largest sums of money, and then small investors may have a shot. Just because an investor has access to an IPO does not make it a sound investment choice, however.
The investment banks listed on an IPO company's regulatory filing are the underwriters to the deal. Although investors do not buy shares directly from the bankers, these firms may have relationships with certain stockbrokers. It is possible that it is in the best interest for a broker if investors buy into an IPO. The best way to protect against this is for investors to do homework on each and every IPO opportunity rather than basing an investment decision based solely on the recommendation of someone else, including market professionals.
Before listing shares in the public markets, a company must file regulatory documents with a governing body in its region. Reading these filings will help you to make the best IPO investments. A company must outline any problems, such as litigation that might be unfolding, in a public filing. Even if those problems are expected to be resolved soon, investors should be able to deem whether or not the risk is worth it.
