What is an IPO?

An initial public offering (IPO) is when a private company offers shares to the public in a new stock issuance. The newly issued shares then begin trading on a stock exchange, such as the New York Stock Exchange (NYSE) or Euronext Amsterdam.

Why do companies want to go public?

A company can go public in several ways, depending on its objectives. The most common way is through an IPO, but companies can also go public through a direct listing or a special purpose acquisition company (SPAC). Here, we zoom in on the pros and cons of going public through an IPO.

Advantages of going public

IPOs are a popular way for companies to go public, and there are reasons for that:

  • Raising capital: The main advantage of going public is to raise capital. When companies want to raise capital, it can be for many things, such as funding research anddevelopment hiring newemployees, reducing debt, acquiring other companies and more.
  • Reputation: Going public can be good for a company’s reputation and credibility. Not only does it give a company a lot of attention and coverage, but companies also have to meetcertainrequirements to be listed on a stock exchange and disclose certain information, such as financial reports. As a result, many people trust public companies more.

Disadvantages of going public

While there are advantages of going public, there are also disadvantages. Some of these are:

  • Financial reporting: Public companies have to disclose a lot of information to investors. For example, companies have to comply with periodic financial reporting, which can be difficult, timely and costly.
  • High costs: The IPO process is not a cheap one. Companies typically have to hire lawyers, investment bankers, accountants and outside consultants. One of the largest costs involved in an IPO is are the underwriter fees, which can range around from 4% to 7% of the gross proceeds of the IPO.
  • Performance pressure: Once a company goes public, there is pressure to perform well, and long-term growth strategies may come second as investors want to see results today.

How does an IPO work?

Before a company issues an IPO, it has fewer investors, such as friends, family, venture capitalists, angel investors, etc. Once a company goes through an IPO and the public can buy shares of the company, the public therefore becomes part-owner of the company.

Going public through an IPO can be a lengthy and expensive process. Companies that choose this route usually hire an underwriter, such as an investment bank, to help them with the process, including setting an initial price for the offering and determining the number of shares to be sold. Once the initial price is set, the underwriter issues shares to investors, and the shares begin trading on a stock exchange.

Note that the initial price (IPO price) differs from the price it starts trading. The IPO price is set ahead of the IPO and is the price investors participating in the IPO will pay per share. To attract investors, this is typically lower than what the analysts pricing the company think the shares will go for on the open market. In most cases, retail investors do not have the opportunity to participate in the IPO and can buy shares once they start trading on the exchange. This price depends on the demand of the stock when it starts trading. High-profile IPOs tend to experience volatility when they hit the market.

How to respond to an IPO as an investor

When a more well-known company goes public, it is important to do your research consider the company’s financial health rather than fall into the media hype. One resource you can use is the company’s prospectus, which is a document that every company that is going public has to issue. It includes information about its business, financial records, future projections, risks and more.

Investing in IPOs tends to be risky and speculative in nature. Therefore, you should always consider your investment plan before making an investment decision. IPO prices are estimates, and it is not uncommon for the share price at the end of the first trading day on the market after the IPO to be much lower or higher than the IPO price. Some investors may wait to invest in IPOs to see how they perform in their first days or months on the market to better determine the value of the company.

Investing in IPOs via DEGIRO

At DEGIRO, you can invest in IPOs once they start trading on the market. In the agenda section within the platform, there is a tab for IPOs, where you can find past IPOs or ones that will start trading today. You can also keep an eye out for upcoming IPOs in the news or check out our blog to find out some of the highly anticipated IPOs of 2022.

In some cases, we are able to offer our investors the opportunity to participate in some US IPOs. We will inform you with a message with details about the IPO and instructions on how to subscribe in the trader when this happens.

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The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.

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