| |
An Initial Public Offering or IPO occurs when a private company officially becomes a public company and it starts to offer shares to the public. In most cases, a company will release these shares as a means of getting funds for various business investments. A business will show when it issues an IPO that it is a growing group that is offering more to its clients. A business will get more exposure when it has an IPO. It is also easier for a business to raise capital cheaply while expanding its equity base after the IPO is revealed. Sometimes a business that goes public will have an easier time employing workers and management by offering stock options for those who are employed by the company.
The interesting thing about IPOs is that they can be very large. In 2014, the Alibaba Group (NYSE: BABA) had an IPO of $25 billion, meaning there were more shares to buy. Meanwhile, Visa (NYSE: V) had its own IPO in 2008 that had a value of around $20 billion. However, an IPO does not always work out. A business will spend a lot of money marketing the IPO and managing it. More importantly, there is always the risk that the funds that a business requires will never actually be raised by the IPO because the public is just not excited about it. Investors who want to buy into an IPO might also have some worries. There are no guarantees that an IPO will always succeed. People often enter IPOs because they know they are cheap and that there is always the chance that the stock in question will experience a colossal rate of growth.
To understand why an IPO is often risky, we need to look at the case of Facebook. People were excited when Facebook had its own IPO in 2012. After all, Facebook is the most prominent and influential social media platform in the world. It would only make sense that lots of people would buy Facebook stock because the company is huge and the media was promoting the story. Things did not work as well as Facebook hoped. On May 18, 2012, Facebook went public on NASDAQ under the FB symbol. The stock started out at $38 per share. The stock was able to reach $45 at one point, but many of those people quickly sold the stock, thus causing the stock to finish at $38.23 at the end of the day. Over time, people were investing in the stock but started to sell it off due to the ongoing uncertainty surrounding how the stock might move. The stock would keep falling in value eventually to $20 in August of that year. Of course, Facebook would end up becoming more profitable. It would not be until August 2013 that Facebook’s stock managed to get back to the $38 value that the stock had at the beginning. The stock has been trading at a good rate since and was around $180 at the end of 2017.
This story shows that just because a company is releasing a large IPO of a stock does not mean that stock will be worth investing in right away. There is always a chance that a stock will fall in value after the IPO is released. While that stock might rebound and grow in value like Facebook, it could take months or years for a stock to do that after the IPO. Then again, not all businesses are like Facebook.
There are a few good strategies you can use when investing in IPOs and getting the most out of them.
