Investing successfully in an IPO (initial public offering)
When shares in a company start trading on the stock exchange, it is always a special event. Even when it is a small, family-run firm, financial journalists rarely miss the chance to talk about it. Meanwhile, experienced investors carefully analyse the goals and nature of its initial public offering (IPO).
The IPO market is very attractive because everyone wants to find the next Microsoft and to be part of the privileged circle that bet on an extraordinary company right from its baptism on the exchange floor.
Newly introduced securities can deliver substantial gains provided you are familiar with the conditions and factors affecting the yield on this category of issues.
First issues whose opening price and share volume are revised upward by the underwriters normally constitute a very good choice for investors looking for short-term gain.
Looking back at the history of U.S. and Canadian exchanges, you can observe that newly issued securities deliver a spectacular yield(15% on average) in the first three days of trading – provided you can get your hands on these shares at the underwriters' offering price.
For an investment to be sound, a share issue should serve not merely to enrich early investors or to mop up the company's debts. The capital raised in the initial offering should ideally go toward achieving growth for the company or toward acquisitions.It is best to bet on companies that have been around at least 10 years and that have shown regular and above-average growth in earnings and sales. Company size is another important factor:investors should seek out firms with market capitalization of at least $100 million.
University research in the U.S. and Canada has also shown that the most lucrative share issues for investors are those guided by major financial institutions with their teams of analysts, their big institutional clients and prestige among their peers. Desjardins Online Brokerage and Desjardins Securities meet all these conditions.
Finally, remember that companies supported by institutional investors (or by venture capital) before their public share offering generate twice the yield in their first five years as public companies in comparison to companies that did not attract this type of financing.
Investing in a new share issue, regardless of the type of company or the kind of share issued, does not save you from doing your homework. You have to be just as vigilant as when you are buying any other shares on the market and to pay attention to these few extra rules.