There are quite a few benefits to participating in an initial public offering (IPO). By getting in on the ground floor with a bold new company, you can position yourself to reap maximal profits.
What is an IPO?
Every year, the investment world gets excited about innovative new companies. Though Silicon Valley firms may dominate the headlines, every industry features bold new leaders with innovative ideas. Most firms start out as private ventures owned by a small group of insiders. According to the experts at Money Morning, private investment is “usually limited to accredited investors, banks or venture capital firms.”
The IPO is a process whereby a company offers up ownership shares for public sale. While maintaining its original leadership, the company offers retail investors the opportunity to profit from the company’s rising trajectory. For any new company, going public can usher in a new era of increased funding.
This funding gives companies the resources they need to invest in infrastructure and build long-term institutional health. The IPO is one of the pillars of the financial structures underpinning the global economy.
Potential Risks of IPO Investment
Despite the profit potential in IPOs, it’s important to understand potential risk factors. As with any other investment, there is no guarantee of success in IPO investment. Even the most talked-about companies have occasionally failed to deliver on their initial potential.
Ironically, too much hype can work against IPO investors. If public excitement leads to immediate share price inflation, this inflation can create a share price bubble that must eventually collapse.
How To Invest in New IPO Stocks
Fortunately, there is a way for prudent investors to limit their exposure to inflation risk. You must not be spooked by early share price fluctuation. If you are following expert advice, you already avoid the perils of trading on a day-to-day basis.
As usual, slow and steady is the best approach. If you buy into an IPO and see an immediate price drop, you’re well-advised to hang onto your stock and await further developments. So long as the fundamentals of the company are strong, you can be confident that the share price will ultimately vindicate your caution.
Historically Important IPOs
Wall Street lore is full of stories of legendary IPOs. The most successful IPOs include offerings by Facebook, Visa, AT&T, and Kraft Foods. Many participants in these IPOs saw their investments double, triple, or even increase tenfold. Many early investors in Apple and Microsoft became wealthy on the basis of these shares alone.
Over the years, many of the wealthiest people in the world built their fortunes by taking advantage of new IPO stocks. Despite his famous risk aversion, even billionaire Warren Buffet has lauded the benefits of judicious IPO investment.
To make the most of IPOs, avoid the temptation to buy into trendy companies that lack fundamental strength. So long as you recognize the risks of IPO investment, you can potentially use IPOs to build an appreciable fortune.
