What to Know About New IPOs

How can you raise capital quickly? With a large pool of investors. For many companies, the public market is the place to do it. To get there, they need to make an initial public offering, or IPO.

Let's cover the key points you should know about IPOs, including IPO risk, new stock availability, and how the process works.

What is an IPO?

An initial public offering (IPO) is the traditional way a company can go public. They file tons of paperwork with the Securities and Exchange Commission (SEC) and go through a months-long approval process.

Companies can raise anywhere from hundreds of thousands to billions of dollars in capital during an IPO, using the sale of equity in the company

How do investors participate in an IPO?

To participate in an IPO, you first have to find a company that's about to go public. You can do this by scouring S-1 forms filed with the SEC. You can invest using your brokerage account once the stock hits the retail market (which can take a few hours from the initial debut, after institutional investors get their share).

When conducting your IPO research, choose an IPO that is underwritten by a strong investment bank. Additionally, be sure to read the IPO's prospectus, which will lay out the company's economic standing, how the money raised will be used, and possible risks and opportunities.

A new IPO's pricing and availability

Before an IPO stock is readily available, exchange employees hold a price discovery session where they determine what the going rate for each IPO share is. They're also looking for the potential level of interest in the stock. They do this through bidding. This is really important as public interest in the stock can make or break the IPO.

Take a look at Tristar, the Dubai logistics firm, which dropped its initial plans for an IPO due to lack of investor interest. 

The price discovery session is usually held by the Designated Market Maker (DMM) who holds these shares, and is in charge for the IPO's first market open. The information from all the bids is aggregated, and a weighted average helps determine the final price for the IPO.

As you can imagine, this is all a pretty lengthy process, which is why the IPO is not available immediately at market open (9:30 a.m. ET) to the general public. 

Volatility in new IPOs: What's the risk?

When a new IPO launches, there's often a market pop, where the price increases well above the initial price . But share prices for young stocks can experience volatility months after the initial offering. 

IPOs are not inherently low risk, but they do offer potential for large gains in the short- and long-term. Just look at Adobe (NASDAQ:ADBE), a U.S. computer software company, whose share price has grown 262,745% in the 35 years since its IPO.

New IPOs in 2021

Keep tabs on new IPOs that are coming up in 2021, like:

• Stripe

• Instacart

• Robinhood

• Thoughtspot

• Nextdoor

Research and weigh your options when investing in an IPO

IPOs are an excellent way for companies to raise capital by selling their shares to the general public. However, it's important to research the company's economic health and capital investment strategy. IPO investments carry risk and reward, and you should always keep due diligence at the forefront.