Explained: The Difference Between an IPO, ICO and STO.
Part 1
Trading can be confusing, and beyond confusing — daunting. We’ve all experienced the scenario where we get excited about a concept, fire up the ol’ Google search and then it happens — you’re slammed with a seemingly foreign language, manifesting as a tsunami of investment terms and numbers… and let’s be honest, we’re not The Wolf of Wallstreet… yet…
Maybe after following this series though!
So many different ideas and concepts fly by at breakneck speeds as popular Youtuber’s rattle off investment lingo, and for the new trader, it can be absolutely terrifying.
But don’t worry, we’re here and we understand how terrifying it can be — because we were once in those shoes! This is why we’re introducing our community to these concepts at their pace, one step at a time. In this series we’ll be diving into what an IPO is, what an ICO is, what an STO is, and not only the differences between those, but how they affect your investment strategy and important factors to stay on the lookout for. Before we dive into these terms take a quick moment to familiarize yourself with our past blog 21 Terms to Understand Cryptocurrency!
What is an IPO? The IPO Basics.
At its core, an Initial Public Offering (IPO) is the very first time a sale of a company’s stock is offered to the public, as well as will begin listing on an exchange (think NASDAQ, NYSE, etc). In the early days of a company all of the stocks are managed internally, in a private format with a small group of people who are usually important to the company managing their distribution, commonly the founders. Until a company chooses to “go public” their stocks are closed off to every-day investors and groups seeking to exchange their capital for stock. In the past it was generally that only companies with a demonstration of strong financials and proven track-record could go public but as more exchanges have populated, an increase in leniency has followed.
So this begs the question — why launch an IPO?
An IPO acts as a phenomenal way for companies to raise much needed capital. Literally and figuratively it opens up companies to a whole new world of investment potential. Previously where companies were constrained to private deals and investors, through an IPO and eventually exchange listing they can now connect with millions of investors from around the globe.
It’s important to note that though once a company goes public they’ll be able to raise capital through their shares, they will forfeit much of the financial leniency they experienced as private, in now that they have to report all of their financials to the public quarterly, form a board of directors and ultimately adhere to every guideline laid down by the SEC or similar regulatory body.
“ Are IPO’s good investments for me?”
As with everything investing, we have to evaluate our risk-reward potential. An IPO might be riskier because we have absolutely zero data concerning its trade history, but it’s also a potential opportunity to get in at its very first and possibly lowest price ever. Traditionally it’s been found that big companies with big IPO’s tend to do poorly at first, but in some cases yield the highest returns over an extended period of time. Something noteworthy to consider is that to participate in an IPO an investor must be registered with a brokerage firm. Generally brokerage firms will have guidelines such as a member must hold a specific account balance or have numerous transactions, therein creating a higher barrier to entry than investing in already active stocks.
Always do your homework and make sure you can justify why you’re investing in ANY stock!
So to recap:
- Before a company goes public usually the founders will manage the stocks privately.
- IPO’s are the first time the public can purchase a stock
- When a company goes public they become extremely regulated by the SEC and have to follow a strict set of transparency guidelines for their investors.
- IPO investors must be partnered with a brokerage firm before investing, creating a higher barrier to entry than traditional investing methods.
- IPO’s can be risky, but sometimes risky investments yield the highest rewards — Always do your own research!
In our next blog we’re going to discuss the basics of an ICO as well as compare and contrast the two, highlighting the advantages and disadvantages of both. For more Coinstack content join us below in one of our many communities:
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