Investing in IPOs

You may have first heard of the term IPO during the tech bull market of the late 1990s, the "spring" of the Silicon Valley dot.com companies. An initial public offering, or IPO, is the first sale of stock by a company that has gone public. It's an offer by a company of its shares to potential buyers prior to the stock actually being listed on the stock exchange.

Most small businesses are private companies, although some big companies also choose to be private, like Domino’s Pizza and IKEA. Why does a company go public? Going public usually raises a large amount of money. Companies may also go public to take advantage of better rates when they issue debt and to make it possible to create employee stock ownership plans that attract clients. Stock can be issued by a public company, so mergers and acquisitions are easier.

For beginner traders, it may be useful to keep in mind that an IPO is just selling stock. IPO investing is not necessarily good or bad, it's basically all about sales. If you can convince people to buy company stock, you can raise a lot of money. A requirement in getting shares in an IPO is to have a frequently traded account with one of the investment banks in the underwriting syndicate.

Like all kinds of investments, the success of IPO trading depends on market conditions. The soundness of a company's business plan is usually a good indicator. However, if the company is certain of success and is just looking for financing, the first offer may go directly to larger clients or wealthy private investors. Smaller clients may hear about the deal when it's all finished, or get the leftovers.

Getting in on a hot IPO is very difficult, and the company may be difficult to analyze because there is an absence of historical info. Do your homework and watch the first trades, and observe the market depth before trading opens.