After reaching another all-time high, the market declined slightly, largely due to stalled talks on a Covid stimulus package. The other big news for the market was the IPOs for AirBnB and DoorDash.
And if you’re wondering what, exactly, is an IPO, you’re not alone. IPO stands for initial public offering. Companies generally start as privately owned businesses. They may have investors beyond the founder, beginning with friends and family, then expanding to angel investors. An angel investor is a professional investor who takes significant risk to invest in a new company. Think Shark Tank here. Venture capitalists and private equity firms may also provide capital for an ownership stake.
Eventually, many companies want to raise money beyond these options. Or the original investors want to cash out and sell some or all of their ownership stake in the company. At that point, the company will work with an investment bank for their initial public offering, which is the process of offering shares of a privately-held company to the public.
The company will reach out to several possible underwriters for proposals. The underwriters will perform due diligence on the company, and propose the number of shares or size of the IPO, initial asking price, and so on. Once an underwriter is chosen, paperwork for the IPO is filed with the SEC and the proposed exchange, such as the New York Stock Exchange or the NASDAQ. Trading is open in the new public company on the date of the IPO.
If you’re trying to buy shares of an IPO, that may be difficult. Typically, the investment bank that is underwriting the IPO will also sell the majority of the IPO shares to institutional or accredited investors such as mutual funds and pension funds. Some brokerage platforms also receive an allotment of shares, although those typically are sold to the firm’s largest clients. You may be able to purchase through a brokerage firm, but for companies like AirBnB, small investors rarely have a chance to buy those initial shares, and instead purchase them on the exchange once trading has begun.
Trading in the first few days of an IPO is often highly volatile. Many highly promoted companies have seen prices fall dramatically after the IPO. We generally recommend a diversified portfolio that is focused on your goals, while taking into account your time horizon and risk tolerance. Purchasing an IPO is fun and exciting, and you may hit the jackpot. But you may also lose.
2020 has been a boom year for IPOs and SPACs. A SPAC is a Special Purpose Acquisition Company – a publicly traded company created to raise money and buy a privately-held company. In short, lots of companies are growing to the point where they are being listed and publicly traded. This continues the tale of two economies: many big companies are booming, and main street shops and restaurants are suffering or going under.
As an individual investor, everything starts with a firm foundation of emergency savings and reduced debt. Take advantage of any employer match in a 401(k) or other plan.
And if you’re looking for a unique Christmas present for your adult children, consider a financial planning package to help them get organized and on track. Check out our website at covingtonalsina.com, or visit our Facebook page to learn more.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.