Budding companies that start trading on the stock exchange with an initial public offering (IPO) can make a worthwhile investment. If you’re an early investor in these new business ventures, you could make a profit in a short time. Here is how to invest in upcoming IPOs.
IPO Spotlight: Snowflake (NYSE: SNOW)
Snowflake is a cloud-computing software that gives you full access to the world of data and services. It helps organizations go further and faster in the Data Cloud. The Data Cloud enables you to easily discover and securely share live governed data with your customers and business partners.
As a platform, Snowflake delivers a seamless experience across multiple public clouds such as Amazon Web Services, Azure, Google Cloud and Salesforce. It unifies, integrates, analyses and shares data that was previously working in silos. Snowflake combines data engineering, data warehouse, data science, data applications and data sharing on a single, powerful platform.
In February 2020, Snowflake raised $479 million at a $12.4 billion valuation. The company filed to go public a few months later and confirmed that Berkshire Hathaway would be buying a stake in Snowflake at the IPO price. It generated revenue of $264 million in 2020.
Stay up to date on all IPO news with Benzinga.
What is an Upcoming IPO?
An IPO is the 1st time a privately-owned business offers equity share in its company to public investors. At this time, the company is underwritten by an investment bank or a broker that buys a limited amount of shares for a set price. These shares are then distributed to the financial market through major stock exchanges to let investors buy and sell the company stock.
Why Does a Company Go Public?
Taking a company public is a major strategic decision. There can be many reasons behind a company going public:
- To raise capital
- To compensate employees with public company stock and stock options
- To build the brand and reach a broader audience
- To acquire other companies with an equity share
In some cases, the company can be repurchased after going public by a private investor to save it from undergoing massive losses. Michael Dell and Silver Lake reacquired Dell for $24.9 billion after the tech company went through dismal performances in the market.
How to Track an IPO
You can track an IPO in several ways:
NASDAQ. NASDAQ is a major stock exchange and lists thousands of stocks for public trading. Its IPO Calendar tracks the daily price movements and shares trade volume of companies.
NYSE. The New York Stock Exchange (NYSE) has a dedicated section to track IPO activity called the IPO Center. It has crucial financial information on upcoming IPO stocks such as the issuer, shares filed and file price range.
Yahoo! Finance. You can check the latest stock information of IPOs on Yahoo! Finance. It has an IPO section that details stock data such as the stock exchange, data of issue, price range, stock price and share trade volume.
Source – Yahoo! Finance
How to Invest in Upcoming IPOs
Here’s a guide to help you invest in upcoming IPOs on major stock exchanges.
Step 1: Pick a Brokerage
Check out these top online brokers to get you started.
Step 2: Decide How Many Shares You Want
Depending on your financial goals and the money you want to invest, you can choose the number of shares you want to buy. The easiest way to decide this is by dividing your investment budget with the price of the stock.
For instance, if you have $1,000 to invest and the price of the IPO is $10, you can buy up to 100 shares of the stock. After that, complete the following criteria:
- Order type. Based on your trading strategy, you can choose the type of order you want to execute.
- Bid. The bid is the price at which you want to buy the shares. If you have limited money to invest, you can consider investing in stocks under $20 such as iHeartMedia (NASDAQ: IHRT). Let’s say the stock quote of IHRT is $7. You can set the bid price for $6 and as soon as the stock price drops to that price, the order gets fulfilled.
- Ask. The ask is the price at which you want to sell the shares you own. Ford (NYSE: F) is one of the best stocks under $10 to invest in. In this case, you can set the ask price for Ford at $7 and the order gets executed when the stock price rises to that value.
- Spread. The spread is the difference between the bid and the ask price of the stock. If the bid price of Intel (NASDAQ: INTC) is $58.5 and the ask price is $59.5, the spread is $1. Stocks under $5 tend to have lower spreads.
- Limit order. A limit order lets you trade a stock at a particular price. You can only set a buy limit at a lower price than the stock quote. Similarly, you can only set a sell limit at a higher price than the stock quote. If the broker is unable to find a buyer or a seller to match your limit price, your order will not be executed.
- Market order. A market order lets you buy or sell shares at the price of the stock quote. Although you can’t control the price at which you trade, a market order has a 100% chance of being fulfilled.
- Stop-loss order. A stop-loss order lets you limit the losses from your trades. You have to set a stop value that is below the price of the stock. Once the stock quote reaches the stop value, it will automatically turn into a sell market order.
- Stop-limit order. You have to assign 2 values for a stop-limit order. If you set a stop value of $58 and a limit value of $56, the order will only be sold at $56 or higher.
Step 3: Execute Your Trade
Once you’ve decided on the number of shares you want to trade and the order type, you can execute the order to have it fulfilled.
Pros to Buying Upcoming IPOs
Take a look at some of the advantages of investing in upcoming IPOs.
IPOs can grow exponentially in value. IPOs present an exciting opportunity for early investors. If you had invested $1,000 in Alphabet (NASDAQ: GOOG) during Google’s IPO of $85 back in 2004, your shares would be worth $1,478,000 today. Tesla (NASDAQ: TSLA) went public with an IPO of $17 in 2010. If you had invested $1,000 in Tesla, your shares would be worth $1,210,000 today.
IPOs can help companies acquire or merge with other businesses. Investors take an active interest in IPOs to support mergers and acquisitions. Privately-owned companies in need of cash go public in an attempt to raise capital for further acquisitions and business expansions. The early investments from IPOs can fuel the company’s capacity to buy into other businesses and offer a large equity stake to cut the cost of acquisition. These acquisitions can boost the value of a stock and increase your returns in the long run.
Cons to Buying Upcoming IPOs
Take a look at some of the disadvantages of investing in upcoming IPOs.
IPOs don’t have sufficient financial information. Since IPOs are newly-added to the stock exchange, there is hardly any financial data that can give you insightful indications of its market performance. There are dozens of financial websites you can refer to for historical stock data. You can easily access performance records and price movements of listed stocks through these platforms. IPOs, on the other hand, only have a prospectus that gives you limited information about the risks and opportunities involved in the investments.
There’s uncertainty over the outcome of an IPO. Generally, investing in IPOs is considered risky. It’s hard to predict the market swings of an IPO. Some IPOs can rise by 50% within minutes of going public, and some IPOs can tank as well. Facebook (NASDAQ: FB) went public in 2012 with a price of $38 per share. The social media stock had dropped to $20 in 6 months of going public. Coca-Cola (NYSE: KO) went public in 1919 at $40 per share. By the end of its 1st year, the beverage stock took a sharp fall and was trading at $19 per share.
Early Bird Investors Earn More
Many investors have made millions by selling the shares they bought during IPOs. If you’re new to investing, IPOs may not be your best bet. Spotting a profitable IPO requires experience and trading skill but the payoff can be worth the risk.