With a lot of unicorns emergence in the business, this one term has become a hot topic in business and the investing world: initial public offering (IPO). What exactly is IPO, and why do a lot of businesses decide to go public? What should we do if we are interested in IPO investing? Find out the answer below!
Starting from the root: knowing the purpose of IPOs
Privately-owned companies need money for business operation. Where does the money come? For starters, it usually comes from main capital sources such as venture capital or bank loans. However, the companies can’t only rely on those two sources for a lifetime, especially if the company has a bigger ambition that involves a big amount of money as well. Not to mention that the money received from such sources need to be returned, either in the form of loan payments or other returns to venture capitalists. One of the options for the companies to maintain their business is to go public.
Investing in IPO: things to note
First of all, dig up all information related to the company. It might be a little bit difficult to find information on private companies. However, the companies will provide a preliminary prospectus, also known as a “red herring”. The prospectus is issued by the issuer and lead underwriter. It contains the typical information that publicly-traded company share.
Secondly, keep in mind that companies having IPO are often in the early phase of growth. Try to think about the contributors to the company’s success. What caused the company to grow so fast in a relatively short time? Is it a lack of competition? Is there a possibility the situation to turn upside down once the company goes public? Investor Junkie also suggests to always perform due diligence on the company that you have interest in.
The most important thing to note is: do not get swayed by the trend. Just because a company is having its IPO soon, does not mean you need to invest right away. Noted from Investor Junkie, the hype surrounding the IPO news is mere speculations on miracle moneymaking activities. Always think rationally on your decision. No IPO investing can turn you into a millionaire in one day.
Read also: 5 Tips Before Investing in IPOs (Part 1)
Follow and join us on Youtube, Instagram, Facebook, and Twitter to be part of the trader community in Asia
