Initial public offerings (IPO) refers to the first time a private company sells its stock to the public. The idea became popular in the 1990s when people invested a lot of money in different companies and reaped huge returns.
The party didn’t last for long before the tech bubble burst and returned the IPO market to normalcy. In short, investors could no longer triple or double-digit gains they were used to in the early IPO days by just flipping stocks.
Nonetheless, not all hope was lost. Nowadays it is still possible to invest in IPOs and make a killing. The only difference is that focus has moved. Instead of trying to wait on a stock’s initial bounce, investors are more interested in analyzing its future prospects.
Below are tips on how to buy IPO stock with SoFi:
1. Do a thorough research
Investing in IPOs can be challenging. This is because no investor really understands the future prospects of a company. If you are considering investing in an IPO, then it would be best to go deep in your research about the company you are about to buy its stock.
Search for information online about the company and its competitors. What type of products or services is the company offering? How is the industry currently doing? Is the competition too stiff? These are some of the questions you should seek to answer before investing.
2. Choose a company that has strong brokers
This is also something to be considered when investing in IPOs. Investors should try to select companies with strong underwriters. This is not to imply that renowned investment banks don’t bring duds but the truth is that strong brokerage firms are normally associated with quality.
Investors should always exercise precaution when choosing to work with small or unpopular brokerage firms. This is because they can decide to underwrite any company.
3. Read the prospectus, always
As an investor, you should avoid putting all your faith in a prospectus. You need to go through it and understand all the details therein. Reading a prospectus may not be that interesting but you need to try your level best too.
The broker introducing the company to the public is the one responsible for issuing it to investors. A prospectus is important because it highlights the risks as well as opportunities that the company presents.
4. Try holding until the lock-up period comes to an end
The lock-up period can be described as a legally binding agreement that restricts investors from disposing of shares for at least 24 months after purchasing them. The contract is between the company insiders and underwriters.
5. Be cautious
Skepticism may not be a good attribute in other aspects but it is essential when it comes to reaping big in the IPO market. The uncertainty that always surrounds IPOs is attributed to a lack of adequate information.
According to SoFi, two benefits that private companies enjoy is getting to choose who invests in them and not having to report financial results to a large pool of investors. Most successful companies always participate in IPOs. However, getting the right company to invest in is not a walk in the park.