Initial Public Offerings (IPOs) are the first time a company sells its stock to the public. Sometimes IPOs make huge first-day gains like Chipotle Mexican Grill (CMG)
which was offered at $22/share
and ended their first day of trading at $44/share
. Wow. However there are times when the market is overall bearish and the IPO will flop like in the case of Vonage Corp (VG)
which was offered at $17/share
but has now dropped to around $6.5/share
Unfortunately more than ever individual investors dont get access to the stock at initial offered price. Its the mighty institutional investors who do. By the time the general public can trade the stock, most of its first-day gains have already been made. However, a knowledgable investor should still watch the IPO market, because this is the first opportunity to buy these stocks.
Reasons for an IPO
When a privately held company needs to raise additional capital, it can either take on debt or sell partial ownership. When the company decides to sell ownership to the general public, they engage in an IPO. The most common reason for the company to go public is that capital raised through an IPO does not have to be repaid, whereas debt securities such as bonds must be repaid with interest. In return the current owners of the privately held company will lose a part of their ownership.
The company will load the burden of the sale of its shares to the public by hiring an investment bank. Once the Securities and Exchange Commission (SEC) approves of the company’s profile, the investment bank and the company will decide on the price and date of the IPO; the IPO is then conducted on that date. IPOs are sometimes postponed or even withdrawn in poor market conditions.
So what can you as an individual investor do to make profit from IPO ?
: One should understand that investing in an IPO can be risky business. The investor must thoroughly investigate all available information to understand the value of the stock. I personally like buying IPOs of well known brands. My personal favorite being MasterCard Incorporated (MA) which was offered at $40/share and is now trading at $105/share.
Other Good IPOs: CMG, DIVX, BKC
Coming soon good IPOs i like: Aruba Networks, US Auto Parts, Vanguard Car Rental, Sterlite Industries, Oculus Innovative Scis