Friday, June 1, 2012

How to Get Rich - Beware the IPO

Have you ever invested in an IPO only to see it falter ?

Do you even understand what an IPO really is ?

Be careful when looking at any IPO for your future !

What is an IPO

Let's start by defining what an IPO (short for Initial Public Offering) really is. An IPO is created when a privately held company wishes to go public and start selling shares of it's organization in the public market place such as a stock exchange.

In order to do this, the organization creates the IPO and establishes a reasonable value for it's shares based on it's economic fundamentals. It will determine how many shares will be issued and at what price. This is the general definition of the IPO.

Why the IPO is Created  

There are many reasons why a company may wish to go public. However, one of the most common is that the founder of the organization feels that he/she for whatever reason can no longer develop the organization to it's full potential. Another reason could be that the founder has another project in mind and wishes to cash out so to speak and put their future efforts towards the new idea.

For whatever reason, the founder is basically selling their organization to the public through this Initial Public Offering.

Dangers of  the IPO

The biggest danger with buying an IPO is that you would be buying a security that has no proven track record in the public marketplace. There is absolutely no history as to how the public will perceive this investment. Therefore, no one knows which direction this security will travel once shares start trading publicly.

The IPO generally has a lot of publicity and even some hype before it's official launch date. The founder's goal is to receive as much as he/she can from it's sale. Often emotion will play a big part in the investor's decision to purchase the IPO. This can be a terrible mistake, especially for the average investor.

The IPO and You  

My advise would be to never even consider buying an IPO. Let the buying frenzy subside and wait until you see some history develop with how the public will see the new security. Let the numbers come out publicly as to the earnings and profitability of the security.

The new security may be of future interest to you. But this should only be if it fits in with your overall investment plan and the numbers make sense. Above all, never let emotions get in the way of your investment decision making.

As always, I welcome your comments and suggestions for future topics.

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