What is an Initial Public Offering (IPO)?
When a company moves from being a privately owned company to a public corporation, it means that individuals (like you) can start investing in that corporation.
It is a significant change for a company as it gives them access to new streams of money which they can use to grow their business. The first time the corporation offers its shares to investors is called an Initial Public Offering (IPO).
There is a lot of information about IPOs available online, so for our purposes, we want to highlight the three key reasons it is important for you as a new investor to have a general understanding of IPOs:
1. Companies usually go public when they reach a certain stage of their business and are already performing well. Since it is a risk for the company to launch an IPO, it’s generally something they plan and consider for a long time in the lead up to actually doing it. The decision costs money for the business and it is a lengthy process, but if things go well, it can help the business to expand and increase their profits.
2. Once a company goes public, they will gain visibility on the market. If they do well, investors are likely to take note of this and continue to invest, allowing the business to continue to grow. However, when a company is not doing well, even the perception of a loss of value can lead to a decrease in their actual value.
3. While it can be appealing to invest in IPOs, (ie. companies that recently went public) it is not generally recommended for new investors. The first year of share prices tend to fluctuate significantly. It can also be difficult to find unbiased information about a company’s financial situation early on, since this information will initially come only from the company themselves.
However in time, there will be more reliable information from third parties regarding the company’s stock, so it might not be a bad idea to wait and see.
That being said, it can be interesting to track companies that plan to launch or have recently launched an IPO and watch out for familiar brands. For example, Airbnb plans to go public in 2020 and while the sharing economy has been on the rise, the global coronavirus outbreak has severely impacted travel. So it will be interesting to see what happens and a good learning opportunity, while not having any financial interest in the outcome.
Kate Harris is a copywriter at MakeImpact, a Nordic Impact Fintech that helps individuals make sustainable investment decisions through their values.
