What is an IPO?
An IPO, or initial public offering, is a process of a company, or pakihi, moving from private ownership (owned by its founders, financial backers and employees) to a public company, popularly referred to as going public. When a company is public, its shares are listed on a share market for anyone (i.e the public) to buy and sell.
During an IPO, a company creates new shares to sell in order to raise money (often used to grow the company). These shares are typically sold to a select group of institutional investors. Historically, this has been one of the advantages institutions have over everyday investors.
What are the risks of investing in an IPO?
As with any investing, buying shares in an IPO comes with possible risks and returns. During an IPO, those first investors are buying a slice of a company before it's hit the open share market. This means the share price hasn't experienced a market valuation. Because share prices are driven by supply and demand, early investors won't know if there's low or high demand for shares in the company.
Because there's often little historical data to analyse the company before it has started trading, it can be difficult to anticipate the share price on its first day of trading or near future. Most IPOs are for companies going through growth periods (which is why many are raising money through an IPO in the first place!). Others may have used an IPO to pay off debt - like Birkenstock - and there can be uncertainty about their future value. And there are plenty of IPO examples where companies traded below their IPO price.
While a company’s prospectus can make for intense night time reading (some coming in at around 200+ pages!), to fully understand the risks, you'll want to do your own research and have an IPO plan before committing any amount of your hard-earned money.
Learn more about IPOs