Investments in securities and other financial instruments always involve the risk of loss of capital.

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Investing In IPO’s

After the doom and gloom of 2020, 2021 has been a breath of fresh air for the investments sector. Despite the threat of the Delta variant and the need to mask up in public, 2021 has become the year of the Initial Public Offering or the IPO.

The IPO market has overcome the sharp 2020 bear market and is bouncing back at levels only first witnessed during the dot-com boom. Digital transformation is pushing more private companies into the public sphere, and the 2021 IPO market is flush with gleaming technology-sector IPOs.

Should all 375 listed IPO deals close successfully by the end of the year, IPOs will have raised $125 billion in business capital in 2021. Some of the best-performing companies that have gone public in the last year on NASDAQ or the New York Stock Exchange include Affirm, Zim, Qualtrics, Bumble, Coursera, and 2020’s CureVac (CVAC).

CureVac, for instance, went public in August 2020. The Germany-based pharma manufacturing business share prices sold at $16 a share but had skyrocketed to $55.90 by closing bell. IPO investors had a return value of 596.75%.

Zim Integrated Shipping Services Ltd (ZIM) on the other hand, went public in January 2021. Its share offer price was $15 and, by closing bell had flopped to $11.50. Nevertheless, the shipping company shares are now selling at $54.46, and ZIM is one of 2021’s best-performing IPOs.

Benefits of investing in IPOs

As per the examples above, investing in IPOs can bring in attractive returns. IPO stock can gain tremendous capital gains fast, and satisfy you with an annual passive income in the form of dividend payments, years down the line. Other benefits of investing in IPOs include:

When you invest in an IPO, you get in on a successful company’s performance benefits at the ‘ground floor’. Buy low and earn big. Consequently, you will have access to a unique rapid profit window that is unavailable later
IPO shares are an excellent long-term investment product. A well-performing company’s dividends can dwarf your original IPO investment, making these fresh stock issuance activities the most rewarding investment channels in the stock market.
When you purchase IPOs, you are purchasing your stock at a predetermined value. Price transparency evens the playing ground, unlike the post-IPO environment, where the forces of demand and supply play a key role in the determination of share prices.

To illustrate the value of purchasing IPO shares, Warren Buffett is unapologetic about not partaking in IPO sales. “In 54 years, I don’t think Berkshire has ever bought a new issue,” Buffett said in a CNBC interview.

The Berkshire Hathaway CEO and chair passed on Uber’s IPO, saying that he did not have any good reason to purchase the ride-sharing company’s stock. That said, Buffett has expressed regrets over his snubbing of the Amazon IPO in 1997.

At the time, Amazon shares sold at $18. In one of his company’s shareholder meetings, the Oracle of Omaha admitted he had made the wrong call by spurning Amazon and Alphabet shares. “Yeah, I’ve been a fan, and I’ve been an idiot for not buying. But I want you to know it’s no personality changes taking place.” Buffett said.

Today Bezos is richer than Buffett and Berkshire Hathaway later bought $1 billion worth of the multinational technology company shares in 2019 at $1,850 per share. And perhaps Berkshire Hathaway is changing its attitude towards IPOs because, in late 2020, it invested $250 million in the Snowflake IPO.

The downsides of investing in IPOs

Truth be told, not all IPO stocks are worth investor cash. Many IPO stocks have floundered in the public market in the last year. As an illustration, Root (ROOT), a vehicle insurance startup, went public in October 2020. Its shares sold at $27.

Unfortunately, its promise of innovation, disruption and growth has fallen limp and its stock price has been on a decline. Six months after its issuance, its stock had lost 60% of its value.

GoHealth, an online health insurance service, went public in July 2020. Its IPO share price back then was $21. Today GoHealth (GOCO) shares sold at $5.49.

The dismal performance of the above-named company shares is proof that, just like the Oracle of Omaha, investors should be wary of IPO share purchases. Freshly minted company stocks are speculative assets. When a business decides to go public, you will not find much of its performance data in the public domain.

The one rule of investing that an investor should not break is research. To this end, the IPO shares investor may go in blind when purchasing IPO stock, since they may lack adequate performance data to base their decision on.

If you invest in a company that you have not thoroughly investigated, then you are placing your investment capital risk, or rather, making a gamble. Below are other reasons IPO stocks are an investment risk.

IPOs are also subject to high market volatility. Should the share price tumble in the initial days of trading, some investors will jump ship, causing a further drop in stock prices.
Some IPOs may fail because of promoter greed. Some entities are out to make money as fast as they possibly can. As an illustration, venture capitalists could invest in a startup then make a profitable exit by going public.
Successful IPOs go into the market at the right time. Should a business hold its initial public offering in a slow market, then it will suffer some adverse consequences.
A business’s stock price could plummet after the IPO because of factors such as initial overvaluation of company potential, poor management, and performance. If a business has questionable fundamentals or an unfair valuation, your capital will be at risk.
An IPO may fail simply because it lacks the X-factor. The market may fail to respond to a sound company’s reputation, affecting its share price value.

How to stay safe when investing in IPOs

Some of the most awaited fall IPOs include electric car startup and Tesla’s competitor, Rivian and Ajeet Singh’s ThoughtSpot. Additionally, there is The Fresh Market, Flipkart, Instacart, NerdWallet, and Discord IPOs. So how can investors ensure they place their bet on the right IPO stock?

Below are seven business background research tips that will keep your investment capital safe when investing in IPOs.

Like Warren Buffet, purchase shares from companies whose business strategy is obvious. Understand the unique selling position and the problem that they are going to solve in the market.
Dig up data on their market share, size of their opportunity, growth potential, and projected returns on shareholding.
Study the business’s risk profile. What is their current operating environment like? What is the quality of their service or product? Do they have competition and can they stand up to it?
What is their management structure like? The business should have managers and directors that have an exemplary track record and past industry experience. Due diligence on a private company’s management structure will reveal any negative press and other red flags.
The capital structure of the company will reveal the ownership and shareholder’s long-term strategy. Important business stakeholders will have ‘skin in the game’ when they believe in their business.
Find out why the business is going public. How are they going to spend the funds that you send their way? Is the cash injection going to business growth initiatives?
How are the business’s financials? Is the company overvalued? Sound financials are a good future performance indicator.

How do IPOs work?

Going public means that a business is making a transition from a private entity to a publicly-traded company. A business may choose to make this transformation to fund its growth initiatives or access debt payment resources.

Some businesses go public to create liquidity to diversify their holdings. Other reasons a private company may choose to go public include raising a public profile. When a business’s directors and stakeholders make their decision to go public, the company will approach a lead underwriter.

The underwriter will take the business through a securities registration process. Along with that, they will guide the business’ share distribution process. The lead underwriting service will also bring together a group of broker-dealers and investment banks.

These entities are referred to as a syndicate. The syndicate will sell the private company’s shares to individual and institutional investors. To this end, the syndicate controls the IPO process. They will allocate IPO shares to different investors as they deem fit.

The syndicate’s IPO share allocation is not regulated by regulators, such as the SEC. Since the underwriting syndicate has purchased shares from the issuing company, they will allocate shares to individual and institutional investors as per their terms.

The underwriting syndicate generally sets aside more of their share allocations for their wealthy or institutional investors. Historical bias and the fact these well-heeled investors can purchase IPO shares en masse, disenfranchise the individual investors in IPO stock purchases.

Large institutional investors are also long-term investors and will assume long-term holding financial risk better than individual investors can. It follows then that when hot IPOs appear on the horizon, the individual investors are already at a disadvantage. The demand for fairy-tale stock already beats their supply.

How retail investors can get their hands on prime IPO stock?

The game is heavily stacked in favour of asset managers and the broker’s close acquaintances and family. If you are investing with an underwriting firm that works with high numbers of individual investors, you have a higher chance of accessing hit IPO shares. That said, the options left for the small-fry investor include:

Begging for a piece of the popular IPO pie from your broker
Purchasing shares when they trade on exchanges
Investing in mutual funds that purchase IPO shares
Investing with retail brokerage platforms that offer IPO access, such as Freedom24

Freedom24 is an online international investment platform. On it, you can purchase IPO shares, stocks, securities, futures, and ETFs from the North American, European, and Asian markets. Its parent company, Freedom Holding Corp., is a NASDAQ-listed firm.

On Freedom24, all you need to do to invest in the best IPOs on the investment calendar is login and shop your favourite IPOs. Freedom24 has a cart button feature and checkout process that makes the IPO purchase a breeze.

A crucial advantage of the Freedom24 brokerage platform is that its IPO analysts have done the legwork and only list the best IPOs on the platform’s IPO page. Simply choose your IPO and click on the ‘More’ tab to access detailed sentimental and technical research on the carefully selected upcoming initial public offers.

Also, another huge advantage is the strong reliability and trustworthiness of Freedom Finance Europe Ltd., the Freedom24 mother company, have a look at some facts:

– Freedom Finance Europe Ltd is the only EU-based stockbroker listed on Nasdaq, regulated by BaFin and CySec (and fully compliant with the MiFID II)

– Freedom Finance Europe Ltd is a member of Euroclear Bank’s Admissions Committee and AFME (Association for Financial Markets in Europe), classified as ”A” (very low risk) by CreditSafe.

– Freedom Holdings Corp’s client’s number is 340.000 and the market cap is around $4B.

You only need a minimum initial public offer investment margin of $2,000 to make IPO share purchases on Freedom24. On top of that, use its trading software to access the international stock market and track your asset’s market performance.

Client Rating

One important thing and a hot tip for new investors is about the Client Rating. The idea of Client Rating is to give higher IPO allocation to the clients which actively use the various trading instruments of Freedom24 (classic stock trading, etc.).
Even if the first time the client will get fewer IPO shares, the client’s ongoing participation in the launching IPOs, and using the other trading options of Freedom24 will definitely allow him to get more IPO stocks in the next iterations. More info here.

Conclusion

While keeping your eye on an ICO calendar might seem like an easy way to access the best IPO shares, it does not always work out that way for individual investors. Accessing these, the most promising IPOs is not a walk in the park.

Fortunately, the industry is changing. Individual investors have more IPO share ownership channels through platforms such as Freedom24. Now, every investor can easily trade stocks, IPOs, bonds, and ETFs from the comfort of their home.