Last year, 222 US companies went public, helping to raise $55 billion in what was the best year for the US IPO market since 2000. This enthusiasm for IPOs has continued into 2014, where we have already seen the strongest start for US IPO listings since 2000. In the UK, it also looks like IPO fever is back, with a number of well-known names already having listed this year including the likes of Poundland, AO and Boohoo, with plenty more on the way. So, how do you go about assessing whether investing in an IPO is right for you?
Brenda Kelly, Chief Market Strategist at IG, gives her top six tips.
The hype surrounding the listings of well-known brands is not uncommon – just look at the volume of column inches devoted to the Royal Mail and Twitter IPOs last year. This hype can be all-consuming, to the point where investors who had never considered trading in these shares, and know little about the companies involved, decide to take the plunge. It is crucial when investing in an IPO to carry out the necessary research and take a well-balanced view of potential risk and reward. In short, try and ignore the hype and only invest in something if you feel it is right for you.
A grey market is the unofficial trading of a company’s shares, usually before they are issued in an IPO. As such, it not only provides an opportunity to trade ahead of the general chaos of opening day, but also helps gives an indication of how traders and investors are valuing a company before it floats. While they cannot guarantee certainty, there is no denying that they have in the past helped investors identify a more accurate price than many pundits or advisors.
Know your sector
Knowing a company and its financials is one thing; understanding the nuances of their wider sector and the challenges it faces is quite another. As well as researching a company itself, you need to think about the sector in which it operates. Is there a chance the sector as a whole is approaching a ‘bubble’? Could this be about to burst? And how might that impact this potential IPO? All of these are questions that need to be asked in advance of any investment.
Location, location, location
It can be of no surprise to learn that different exchanges can have different rules and (obviously) timings but the complexity this can add to an investment in an IPO on opening day of trading should not be underestimated. Make sure you understand the nuances of dealing with different exchanges before you go ahead and trade.
Think about what makes a company valuable and the potential for growth
Stocks rise on future expectations. If there is reason to believe a dividend may be offered in the post IPO, then bear in mind that this opens the company to both value and income investors. Take a look at the sector peers, does this company have a chance against the competition?
Don’t rely on one source for all your information
Many of us have a favourite trusted source we turn to for thoughts on investments. This could be a family member, a website, or a journalist whose opinion you respect. But my advice would be to never rely just on one source. There’s no reason nowadays, when we all have access to the internet pretty much wherever we are, to not take the time to check a few different places for a variety of perspectives. It could make the difference between a great investment and a bad one.