What is an IPO and how it works

An Initial Public Offering, or IPO, is the process through which a private company becomes a publicly traded entity by offering its shares to the general public for the first time. It is a significant milestone for a company, akin to a grand unveiling of its ownership to the wider market. You would be inviting everyone to become a part-owner of the company and join in its journey toward growth and success.

During an IPO, the company sells its shares for the first time on the stock market. This is a way for the company to raise money for exciting new projects, like building new stores, creating new products, or making their existing ones even better. People who buy these shares become part-owners of the company and investors who buy shares during an IPO hope that the company will keep growing so that their shares become more valuable over time.

The IPO process begins when a private company reaches out to an investment bank to facilitate its initial public offering. The investment bank conducts a thorough financial analysis to assess the company’s value, determining the valuation, share price, IPO date, and a range of other crucial details.

Before launching an IPO, a business must register with the stock exchanges to ensure compliance with all necessary regulations. Once these requirements are fulfilled, the company can be listed on a stock exchange, at a certain price, allowing its shares to be bought and sold.

How to analyse an IPO

When considering an IPO, it is crucial to understand that attempting to analyse short-term market movements may not result in success. Rather than getting caught up in the initial price fluctuations, it’s important to understand the IPO process which results in the initial price. Unless you do your own research and spend time looking at where there are opportunities, recognise that the movements in the IPO price may be influenced by market sentiment and other external factors, and may not necessarily reflect the true value of the company.

When should I buy an IPO?

As a long-term investor focused on building a globally diversified portfolio through global tracker funds, it is key to approach IPOs with patience. Instead of rushing to invest immediately, consider waiting for the market to assess the company’s value. ‘For every good there is bad’. Allow the stock to establish its place within the market and with the right fundamentals, the time will come when funds will introduce the stock into their globally diverse funds. This strategy minimises risk and ensures of any potential addition aligns with your overall investment goals, avoiding putting all your eggs in one basket.

Do IPOs always make a profit?

While IPOs can be an exciting opportunity for companies to raise capital and expand their business, it’s important to note that not all IPOs guarantee immediate profits for investors. The success of an IPO is not solely determined by its opening day performance or initial stock price. Factors such as market conditions, industry trends, and the company’s own financial health play a significant role in determining the long-term success of an IPO. Some IPOs may experience fluctuations in stock price in the months following their debut, and it may take time for the company to demonstrate sustainable growth and generate returns for investors. It’s essential for investors to conduct thorough research and carefully consider the fundamentals of the company before investing in an IPO, as not all IPOs lead to immediate profitability and patience may be required to see a return on investment.

When you are unsure of an IPO, exercise caution and block out the media when it comes to navigating the investment world. Instead of being swayed by short-term fluctuations and market hype, take a cautious approach by looking beyond the initial excitement surrounding an IPO. This can help you make better, more informed decisions that align with your long-term investment goals. By aligning yourself with a low-cost, globally diversified approach and buying the market, you don’t need to worry about the ‘next best thing’. As the late John Bogle said:

“Don’t look for the needle in the haystack, just buy the haystack!”