IPOs: Consider the Risks Behind the Hype

An initial public offering (IPO) is the first public sale of stock by a private company.

This week, Craig Siminski, of the Equity Design Group, shares some information to help you decide whether to “jump in” or to “wait and see” when it comes to these investments.

Companies tend to schedule IPOs when investors are feeling good about their financial prospects and are more inclined to take on the risk associated with a new venture.

The U.S. IPO market was strong in 2018, reflecting the surging stock market and the robust economy.

Inside Out

Although IPOs can sound enticing to an average investor, company insiders may have the most to gain from a public offering. The higher the price set on IPO shares, the more money the company and its executives, employees, and early investors stand to make.

Even so, the IPO process is important to the financial markets and to investors in general, because it helps fuel the growth of young companies and adds new stocks to the pool of potential investment opportunities.

Pop or Fizzle

When IPO share prices shoot up on the first day of exchange trading, it’s referred to as a “pop.” A significant first-day gain may suggest that investor demand for the company’s shares was underestimated. Of course, this doesn’t mean that the company will outperform its peers in the long run.

One catch is that it is often difficult to obtain “allocated” shares that can be purchased at the IPO offering price, the price at which insiders are selling to the market. Investors who don’t have the opportunity to buy shares at the offering price can buy the stock after it starts trading on the exchange. However, much of an IPO’s pop can occur between its pricing and the…

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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 20 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.

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