One of the first questions new investors seem to want to ask is whether or not they should be investing in initial public offerings or IPOs, for their portfolio. An IPO, in case you haven't learned about the specifics, yet, occurs when a formerly private business decides to take on outside investors, either by having the founders sell some of their shares or by issuing new shares to raise money for expansion, while, at the same time, listing those shares on a stock exchange or an over-the-counter market.
Let's understand the appeal of an initial public offering and the upcoming IPOs to watch.
An IPO is short for an initial public offering. It is when a company initially offers shares of stocks to the public. It's also called "going public." An IPO is the first time the owners of the company give up part of their ownership to stockholders. Before that, the company is privately-owned.
When a company embarks on an IPO, it lists a certain number of shares on a stock exchange in order to raise investment capital. IPOs are one of many ways in which companies can seek to raise capital, with other popular options including finding major investors, crowdfunding or using retained earnings. After that, the company can be traded on a stock market and it may be included in a stock index composition later on.
The number of initial public offerings being issued is usually a sign of the stock market's and the economy's health. During a recession, IPOs drop because they aren't worth the hassle when share prices are depressed. When the number of IPOs increase, it usually means the economy is getting back on its feet again.
The appeal of initial public offerings is understandable. Not only are you supplying capital to the economy—capital that can grow real businesses that provide real goods and services to consumers—but you get to enjoy the dream of repeating the experience early investors in firms such as Wal-Mart, Home Depot, Walt Disney, Dell, Tiffany & Company, Microsoft, Nike, Coca-Cola, Target, or Starbucks.
A single stock purchase in your brokerage account, a block of common stock delivered, and decades later your family is obscenely wealthy. You find a wonderful business that is destined for tremendous growth and hold on for dear life as you go along for the ride. In the case of many of these highly successful initial public offerings, the annual dividend income alone exceeded the original investment amount within a quarter of a century.
On top of this, the aggregate cash dividends received had paid back the initial outlay many, many, times over. The shares truly became money machines, printing ever-increasing sums of cash for their owners that they could then go used however they wanted.
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A successful IPO can raise huge amounts of capital. An example of an IPO is when Alibaba floated on the New York Stock Exchange (NYSE) in 2014 and raised over $20 billion. Becoming listed on a stock exchange helps to increase the exposure, prestige and public image of a company, which means that IPOs can increase the firm’s sales and profit in the future and give a more accurate valuation of a stock.
For traders, a float can be a great way of buying a share of a company – or taking a position on its price trajectory – the moment it hits the stock market. IPOs also increase liquidity on the market, which makes it easier for buyers and sellers to fill their orders.
When a company is listed on a stock exchange, it becomes subject to the rules and regulations of a governing body. This means that it is required to disclose financial information – including accounting, tax and profits – all of which can be useful to competitors.
Although the dissemination of information is potentially a con for businesses, for traders it makes the analysis of a company and its share price trajectory much easier because information is readily available.
IPOs also incur considerable costs to the company and require it to make itself fit for the public eye. There is also the possibility of additional funding if the market disagrees with the IPO price, which can send the share price lower straight away. These risks make floating a costly consideration for a business.
The 2019 IPO calendar has been packed with unicorns — Wall Street’s term for a fast-growing startup company that’s valued at over $1 billion.
The opportunity to get in on the ground floor of the next Amazon, Google or Facebook is a tempting prospect for investors. But not all newly minted stocks live up to the breathless pre-IPO hype.
It can take time for a company to find its equilibrium. Remember, if it’s a solid business and you’re investing in stocks for long-term growth (a strategy we wholeheartedly recommend), you don’t have to be first in line to buy.
Unicorns like Uber, Lyft, and Pinterest have already had their initial public offerings this year, but they’re just a few of the companies on the 2019 IPO roster. The list below includes details about the most highly anticipated IPOs this year, both upcoming and already listed:
Understanding what an IPO is and which are the upcoming IPOs to watch is important, but if you need help MT5 AM Broker provides acces to a wide range of stocks, indices, commodities, currencies and cryptocurrencies.
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