Should You Include IPOs in Your Investment Portfolio?

March 8, 2017

8:30 pm

The business world has gone fully digital and trading is no exception. You no longer have to rely on your technical charts showing up in the mail nor do you have to wait for your favorite stock report to make trading recommendations. You can get a trading app that gives you the information instantly.

This is good news because you can now get wind of the latest information quickly, access rumors from other traders across the world, and stay better informed about different companies or emerging trends.

One of the most exciting emerging trends is an initial public offering (IPO). It’s a powerful mechanism for a small, innovative company to get the capital they need to grow at a tremendous rate. It can also be a great opportunity for growth-focused investors.

Why Seasoned Investors Love IPOs

If you’ve been trading for a while, you probably remember the excitement of when Apple (NASDAQ AAPL) issued its first IPO on December 12, 1980. At the time, Apple sold 4.6 million shares for $22 per share. The shares sold as fast as they were issued and by the end of the day, the company was valued at $1.778 billion (the stock closed at $29 per share, a 32% increase).

Steve Jobs, the biggest shareholder, made $217 million overnight, and the IPO created 300 instant millionaires, including 40 Apple investors or employees. Later, financial analysts said that it raised more money since Ford Motor Company way back in 1956. Last year, Apple made $46.9 billion, a quarterly net income of $9 billion.

Benefits & Pitfalls of Investing in IPOs

It’s easy to get swept up in the euphoria of IPOs. After all, you could become a millionaire overnight and spend the rest of your life enjoying a life of grace and ease. However, there are advantages and disadvantages when a company launches an IPO. As an investor, you get to ride the wave, rising with the crest or plunging with the trough.

When a company goes public, it experiences the following advantages:

  • It raises a significant amount of capital.
  • The company can now fund R&D and increase its earning power.
  • It can pay for its capital expenditures.
  • It can clean up any existing debt.
  • It increases public awareness of its brand more effectively than any PR or advertising campaign could possible do.
  • The company may increase its market share.
  • The founder might use the gains as an exit strategy and move on to doing something else.

Still, it’s not all rainbows and unicorns. There are some disadvantages, too. Check them out below to get a full picture before you decide:

  • The company has to be as transparent as possible with its investors. If things are not as peachy as its PR image, they must come clean with investors when it comes to disclosure.
  • The company has to comply with the Securities Exchange Act of 1934 and deliver periodic financial reporting. Since SEC rules and regulations are strict, this can be both complicated and expensive. This makes it difficult for a smaller company to come up with the funds. In addition, they will need to work with SEC compliance consultants to make sure everything gets done properly. Costs include generating financial reporting documents, paying audit fees, and managing accounting oversight committees.

When to Invest in an IPO

While it’s wonderful to join a hot IPO like Apple or Facebook, companies like these are rare. Your best bet is to stay attuned to companies with this type of pedigree. Less well known companies may not be as successful as you would like.

The current buzz is SnapChat. The parent company, Snap Inc., has a $24 billion valuation. According to Business Insider:

“Snapchat’s parent company, Snap Inc., just raised $3.4 billion in the tech industry’s largest initial public offering in over two years. Snap sold 200 million shares at $17 apiece, valuing the company at $23.8 billion, according to a person familiar with the matter.”

Photo: Flickr / Anthony Quintano

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Ryan Kh is an experienced blogger, digital content & social marketer. Founder of Catalyst For Business and contributor to search giants like Yahoo Finance, MSN. He is passionate on covering topics like big data, business intelligence, startups & entrepreneurship. Follow his latest posts on Clear World Finance and Forumsmix.com. 

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