Last Updated on March 9, 2021 by Filip Poutintsev
The initial public offering (IPO) is the process by which a private company can go public by sale of its stocks to the general public. It could be a new, young company or an old company which decides to be listed on an exchange and hence goes public.
Companies can raise equity capital with the help of an IPO by issuing new shares to the public or the existing shareholders can sell their shares to the public without raising any fresh capital.
Let’s take an example of Hubspot (HUBS), a software company that went public in October 2014. It spiked 32% on its first day of trading. It nearly doubled in value over the next 14 months.
Five years later, it traded 73% above its IPO price. Another one is an enterprise software company called Anaplan that followed a similar pattern. It surged 87% on its first day of trading, then kept right on soaring.
History of Buying Stocks in an IPO
The term Initial Public Offering (IPO) has been a trendy expression on wall street and among investors for an impressive timeframe. The Dutch are credited with co-ordinating the primary currently Initial Public Offering by offering portions of the Dutch East India Company to the overall public.
Since then, IPOs have been used as a medium for organizations to raise capital from public investors through the issuance of the public share ownership. However, the 2008 crisis achieved a year with an insignificant number of IPOs. After the crisis, new listings we’re phenomenal.
Advantages and Disadvantages of Buying Stocks in an IPO
Before rushing to invest a pocketful of cash in an IPO, it is important to understand the benefits and drawbacks that come along. It is better to do enough studies and understand the potential benefits and risks.
Advantages of Buying Stocks in an IPO
1. Get into Action Early
By investing in an Initial Public Offering, you can enter the ‘ground floor’ of an organization with high development potential. An initial public offering might be your window to quick benefit in a brief timeframe period. It may help you get rich over the long haul.
2. Long Term Benefit
IPO investments are equity investments, they can possibly get huge returns in the long haul. The corpus earned can assist you with fulfilling long haul money related objectives like retirement or purchasing a house.
3. Price Transparency
The cost per security issued is obviously referenced in the initial public offering request record. In this way, you reach similar data as greater investors. This would change in the post-IPO situation. The offer costs after the IPO would rely on changing business sector rates and the best value that the state broker can offer.
4. Small Investment May Lead to Big Results
The IPO price is often the cheapest price if you invest in a small company that has the potential to grow big. That is because the company may offer a discount. If you miss the IPO window, investing in that promising company may be troublesome on the grounds that stock cost may soar.
Disadvantages of Buying Stocks in an IPO
1. Expensive and Time-Consuming
The initial public offering process requires a ton of work. It can occupy the organization heads from their business. That can hurt benefits. They likewise should have an investment bank. These investment firms are entrusted with directing the organization as it goes through the complexities of the IPO process. As anyone might expect, these organizations charge a heavy expense.
2. May not be able to sell shares
The entrepreneurs will most likely be unable to take numerous offers for themselves. Now and again, the first financial investors may expect them to put all the cash over into the organization.
Regardless of whether they take their offers, they will most likely be unable to sell them for quite a long time. That’s because they could hurt the to k cost if they begin selling large blocks and investors would consider it to be an absence of trust in the business.
3. Transaction Cost
Beyond the recurring expenses of public company regulatory compliance, the IPO transaction process comes at a large cost. The largest cost of a public offering is underwriter fees. Underwriters will commonly cost between 5% and 7% of the gross proceeds, which means the underwriter’s discount can cost up to $7 million on an average IPO.
On top of underwriter fees, companies who raise an average amount of proceeds (approx. $100 million) should expect to spend about $1.5 – 2 million in legal fees, $1 million on auditor fees, and $500,000 on registration and printing fees. The transaction costs will be even higher if a company chooses to hire a financial reporting advisor or other specialty groups.
Investing in an IPO comes along with a lot of paperwork to be conducted. It includes all your personal data which you generally wouldn’t want it out for the world to see. However, you have to give up on it.
An initial public offering could or might not be the proper direction for your company. IPOs go with a number of benefits and drawbacks. There are various examples of companies reaching heights by investing in an IPO.
But it cannot be guaranteed whether or not it will be the same for you or not. So it’s important that you do your research well and understand the risks of it. However, sometimes taking a little risk might not hurt.