What is an IPO?
Lately, you might have come across headlines such as “Lyft employees make millions on IPO and can buy out every house in San Francisco” or “Zoom rocketed 72% on it’s IPO debut”. Some of you might not be familiar with what an IPO means, why it matters, or how to invest in one, so we’ve laid it all out for you. And the next time someone drops some IPO lingo, you can quickly get them up to speed.
What exactly is an IPO?
An IPO stands for an “Initial Public Offering”. It’s the process where a company that is private (owned by founders, employees, and private investors) will go public and can sell parts of the company in the form of shares to public investors. This means that once a company has an IPO, you can invest by buying shares of the company.
Why would a company IPO?
A company might IPO to raise more money for the business or to allow founders, employees, and other investors to sell their shares.
What does it mean when “Zoom rocketed 72% on its IPO debut”?
When a company goes through an IPO they work with a bank to set the number of shares they will sell and the price they will sell the shares at. These shares are bought ahead of time by banks and other private investors at the price that was set. On the day of the IPO, the shares are traded on the market and the price will change depending on the demand. For example, Zoom set it’s IPO offer price at $36, but when it traded on the market the first day people were willing to pay $62 for it (or more than 72%).
Why are we hearing about so many IPOs now?
A number of private companies (e.g., Lyft, Zoom, Pinterest, Slack, Uber, etc.) have decided to IPO the first half of this year. The market has been more receptive to IPOs (which generally means the market is doing well and public investors want to invest). .
How do you invest in an IPO?
Unfortunately, it’s tougher for the general investor to invest in an IPO at the offer price. Often times, when banks get shares ahead of time, they offer them to their high net worth clients (e.g., clients with millions or more). You’ll most likely need to buy the stock when it has started trading on the market.
Should you invest in an IPO?
IPOs are a risky investment. Since they are being traded on the public markets for the first time, it can be tough to tell whether the price is being driven by what’s in the news or short term trading instead of the fundamentals of the business. The high return can be sexy, but it can also go the other direction and you can lose money on an IPO. The chart below shows the most recent IPOs in 2019 on the day of close and the difference between what the stock opened at, and what it ended the day at. Even though Lyft closed up 9%, today it is trading down 19%.
At the end of the day, an IPO of a company will become a public stock that you can invest in the future. To learn more about the basics of investing, check out our investment guide.
Disclaimer: The information provided is for informational purposes only, to assist you in managing your own finances and decision-making. Snowball Wealth is not a financial advisor, investment advisor, financial planner, fiduciary, broker, bank or tax advisor. Accordingly, before making any final decisions or implementing any financial strategy, you should consider obtaining additional information and advice from your accountant or other financial advisors who are fully aware of your individual circumstances
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