Private companies from all industries use IPOs to launch themselves onto the publicly traded stock exchanges. This brings the company access to million, sometimes billions, of dollars of capital that they did not have before.

And it gives early investors a chance to gain a massive return on their initial investment.

Getting in on an IPO can make investors a lot of money too.

In this article you’ll find out more about how to get in on an IPO that could possibly make you a millionaire.

Subhead – IPOs bring big bucks for some investors.

First, you should know that IPOs are financial vehicles that can have substantial risk. So you should never consider any major move in the stock market unless you have consulted with a professional financial advisor.

And for some investors with the right mindset, IPOs could provide a sizable return if you get in at the right price.

People who buy IPOs are sometimes rewarded in the form of regular company dividends that are paid out on a recurring time period by the management of the company. IPOs are also profitable when the shares are sold at a higher price than they were purchased. Often, early IPO shares are offered at low prices, making them a very profitable investment if the stock rises in the future.

Occasionally, the share price of some firms goes up vastly higher than the initial prices offered in the first few weeks.

For example,
-Tesla share prices have skyrocketed 2,100% since it first went public over ten years ago
-Zoom jumped 1,000% higher from it’s IPO in April of 2019
-Facebook’s share price has grown more than 600% since its IPO back in May 2012
-Beyond Meat share price soared 163% in May 2019… on it’s very first day!

To understand more about these returns and IPOs in general, read on.

Here are the IPO Basics

To start, it helps to ask: What is IPO (Initial Public Offer)?
An IPO is a one-time event in a companies lifecycle when it offers the first sale of company shares to the public. This event is referred as an Initial Public Offering. The company intends to raise more money for running the company by having an IPO.

This is the first time a private company offers its stocks to the public. Usually, it is the small and growing companies seeking more capital for expansion that have an IPO. However, sometimes larger private companies will have an IPO for becoming a publicly traded company.

During the IPO process, the company gets the help of an underwriting firm. These firms assist the management team to determine the type of security to issue, number of shares to be issued, the best offering price, and the best time for issuing the IPO.

Although the details vary with each company, a company will use funds raised in an IPO to expand it’s capacity, increase production, or for expanding market share through greater marketing. Since this is the first time that a company is approaching the public for money there is an opportunity for the company to have access to millions of dollars for these activities.

IPOs that bring in millions of additional capital also boosts the corporate image of the company as it gains awareness with public investors.

Benefits of Investing in IPO

A company issues new shares in an IPO to reach capital in public markets.

The company benefits from this new pool of investors who are a new form of capital to be used in running the company. The size of the public markets is measured in the trillions. Companies rarely grow to this size, but the amount of money they receive through an IPO is significantly higher than they could through private investors.

When the IPO shares are listed on the Stock Exchange, then anyone with access to a trading account can buy and sell the shares.

People who buy share of the IPO often buy at low prices which then rise over time. As the company grows, the share price increases and the investor is rewarded with high returns when they sell. When the IPOs are listed, they are most often found on one of the big public stock exchanges.

If an IPO share price skyrockets, an investor can make a lot of profit by selling these shares on the public exchange. As you saw earlier, sometimes the returns can be triple-digits.

Some returns are even higher. Tesla share prices went up over 2,100% since it’s IPO and Zoom zoomed up 1,000% from it’s IPO in April of 2019.

Some companies which are offering IPOs today at a low price will go on to become very successful. As the company gets more popular and successful, the share price will continue to rise, bringing a high return for investors.

So IPOs offer investors the chance to get in early on a company’s growth and reward themselves with higher returns over the long run.

How do you buy stock during an IPO?

The process of buying IPOs is straightforward.

Usually, IPOs are heavily advertised in the media so you can find out about their launch date. There are also IPO calendars where you can see upcoming IPOs on the calendar.

However, you should carefully read the prospectus for the new company before going to apply for IPOs. These documents carry everything you need to know about information about the company and it’s upcoming IPO.

Usually, these documents contain information about the company’s financial situation, the management team, the track record, the future goals, and what the company plans to do with the money that is being raised through the IPO.

The documents are free and are easily available on the company’s website and from the SEC databases.

When applying through your broker, you will need to follow the application form which is available at any broker’s office. Fill up the application form and then deposit the amount that you want to invest. For many companies, there is a minimum number of shares that you must apply for which is clearly specified in the application.

Submit the IPO form (along with the deposit) within the time frame specified by your broker. Today, you can even apply to IPOs online. For this, you need to have a trading account with online brokerage firms.

A Word of Caution – What you should keep in mind before buying IPOs

Investing in IPO can bring big rewards. But it also require research and study before investing in any IPO. To make the most of your investment, and to ensure you get an adequate return, you need to study and understand the documentation provided by the company that is having the IPO.

At a minimum, you need to know the company’s business model, the people who are responsible for running the affairs of the company, the long-term plans, and the current financial situation. You even need to know the industry that it’s operating in and the demand for the product and services. Also investigate the future expansion plans and the diversification plans of the company before deciding to invest in a particular IPO.

Another important point you need to keep in mind about investing in an IPO is that you should only invest if you believe in the long-term success of the company.

For example, consider companies likes Coca-Cola, Wal-Mart, Dell, Microsoft, Walt Disney, and Home Depot.

All these companies have one thing in common. During their IPOs, each company had volatile price fluctuations in the short term, but survived over the long-term because of their sustainable business model. Early investors now have shares worth millions.

So you should be confident in the business model and strategy of the company before you invest in shares in an IPO.

A thorough and well researched IPO investment decision can turn out to be a lucrative one.

Final Words

Putting your money into an IPO is not at all easy if you expect to gain and profit from your initial investment. As we have seen, it requires a proper study of the company and other market conditions as well.

Investing in IPO can only be profitable if you have done your research and stick with the stock over the long term.

This is why IPOs are perfect for those people who are willing to take the time to research and analyze the situation. Of course, there is risk in any investment and IPOs are no different.

Yet for the right company, IPOs offer you the opportunity of buying cheap and participating in the company’s prosperity as it expands and grows in the coming years.