How to invest in an IPO? The process of buying IPOs can be intimidating, but as long as you do your research, it’s not too difficult to learn how to buy IPO stocks. Plus, investing in IPOs presents several benefits over investing in existing companies on the stock market or waiting until companies go public on their own. This guide will show you the 5 steps you need to take to invest in an IPO and how to find out when IPOs are coming out so you don’t miss out on the chance to buy stock!
1) Know what you are buying
If you’re interested in buying stocks of a company before it goes public, your first step is to learn all you can about that company. For example, if you are considering purchasing shares of Google at its IPO, you might want to learn everything possible about Google (before and after its IPO).
For example, find out who is leading it? How much does it cost? What industries does it operate in? If you’re not sure how to research a stock or how stock markets work, there are plenty of resources available on Internet (and offline) that will help you get up-to-speed quickly. Knowing what exactly what you’re buying into before purchasing your shares will help minimize your risk. And remember: there is no perfect time to buy stocks.
2) Check the dividend record of IPO
One of your top considerations, when you invest in an IPO, should be a company’s dividend record. Does it pay regular dividends? How much has it been increasing its dividend payout over time? Is it likely to continue paying those dividends after becoming public, or will that be jeopardized by being a public company?
If you can’t answer these questions about a given stock, that could mean trouble for future dividend growth—and there’s no reason to put money into any investment whose prospects are unclear. Use stock screeners like our free screener tool to find stocks with strong dividend records and make sure they fit all other requirements before investing.
3) Don’t invest too much
If you’re considering investing in an IPO, it’s a good idea to only use what you can afford. While stocks generally go up over time, some rise faster than others. The odds are against anyone hitting it big with any given investment; if you throw your entire portfolio into one stock, there’s a high chance that you won’t have anything left by the time it becomes profitable.
You don’t want to end up with nothing and a loan because you lost it all on that next Google. When considering whether or not to invest in an IPO, make sure you aren’t throwing more at it than you can afford to lose. Remember: It takes money to make money. Your goal should be making enough profit to cover your initial investments, and then some not raking in millions of dollars before even reaching market value.
4) Stock markets are volatile
The stock market is known for it’s wild up-and-down fluctuations. But unlike other investments, such as real estate or precious metals, you can’t hold stocks. You can only buy and sell stocks on a given day based on demand from other buyers and sellers. That uncertainty makes investing in IPOs risky, but also extremely profitable when you get it right.
To reduce risk, stick with well-known companies with proven business models: A company that has successfully operated for years in another country isn’t likely to go bankrupt overnight; similarly, if a large corporation has indicated interest in buying out your startup, there’s little chance of that deal falling through at the last minute (although it’s always smart to keep backup funding options).
Never commit all of your funds to one company: With so much uncertainty surrounding startup investments and IPO timing, always keep at least half of your overall savings separate from those high-risk holdings.
5) Invest for the long term
One of most common mistakes investors make is getting impatient. Many investors are eager to see a return on their investment right away, and when they don’t see that happening, they bail. It is tempting, but also important not to get discouraged when you first invest in IPO. Remember that IPOs often have quiet periods before they officially open for trading; during these periods there aren’t many opportunities for trading and thus little movement on price.
You should also remember that going public means the company is taking its first step toward being a viable long-term investment vehicle; no one invests in companies thinking they’re going to flip them for a quick profit immediately afterward! Make sure your investments align with your personal tolerance levels: As with any other investment, some people will be able to handle risk better than others can.
For example, if you plan on retiring early and need to put your money somewhere safe until then, it might not be wise to invest in an IPO that doesn’t have a lot of history behind it or that has never had positive earnings.