The finance world can be quite challenging and mind-bending at times. With all the different terminology and various calculations that you need to take into consideration if you want to become an investor, it can be hard to make your money worthwhile and pick a profitable place to invest.
And, let’s face it, if you are (like us) a regular Joe that just wants to make a little bit of money and invest a portion of it in some stocks, you would want to do a thorough research to pick the most profitable option and make your investment skyrocket (hopefully).
You might pick Bitcoin, Ethereum or some other crypto. You might want to pick Tesla or Amazon stocks. There are many different options out there that are very popular even though they might not be that risky. And they are good if you want to play it safe - but offer a small potential return on your investment.
But, if you feel like you are lucky, and want to challenge your inner self, then you should look at IPOs. This is only multiplied if you have a strong belief that a specific emerging company will succeed, and become the next Google or Walmart.
IPOs remain to be one of the most popular choices for investors in the past 20 years. We mentioned terminology that is present in the financial space - and IPOs make an important part of it. In fact, it’s pretty common that an IPO increases in price more than double on the first trading day, and there are numerous examples of this, which you can see on this list.
And we know - you might be thinking what exactly are IPOs and what do these three letters mean? Are they some kind of a code only professional investors know about? Or maybe a acronyme for a new version of UFOs?
Jokes aside, you don’t have to worry, as this article will explain everything to you. We’ll talk more about IPOs, what they are in the crypto and economy world, how you can use IPOs to become a better investor and why you should invest in them compared to other options. So - let’s dive in.
An initial public offering (IPO) is the procedure of releasing fresh shares of stock to the public for the first time in a private firm. A corporation can raise equity funding from the general public through an IPO. But let’s debunk the acronyme even further and explain what IPO is in the simplest way possible.
The explanation is pretty straightforward and simple. IPO (Initial Public Offerings) are hares that are for the first time ever present on the stock exchange. It’s the first time a private company is going public and enabling investors to invest in their stocks. Generally speaking, this is the time when the value of the stocks will be at their lowest, and investors can get them at a “discounted price”.
Since there is often a share premium for present private investors, the transition from a private to a public firm can be a crucial period for private investors to completely realize rewards from their investment. Additionally, it enables public investors to take part in the sale.
You don’t have to be an experienced investor in order to invest in IPOs. Even though they might seem complicated, and you may think that only specific people can buy the IPO stocks, that’s not the case. IPOs are public offerings, which means that anyone can buy them one the public exchange. Even you and me. And that’s why they are superior to other kind of stocks.
A firm taking part in an IPO is taking a huge step since it opens up the possibility of significant capital raising. This increases the company's capacity for development and growth. Additionally, the enhanced openness and trustworthiness of the share listing may help it get better terms when looking for borrowed money.
And this is a win-win situation for both the company, and the investors. Company gets the funds, while the investor gets the opportunity to buy stocks of a promising business as an early bird.
Why are IPOs a good investment?
Knowing everything stated above, it’s easy to figure out why IPOs are considered to be a good investment. Imagine that you are first in the line in the 2000s, when Amazon offered their IPOs to the investors. Being an early bird is always a good thing, and many investors think of IPOs as a life changing possibility.
In most cases, the value of IPO stocks is the lowest it will be at the moment of public offering. If the company is promising, the general consensus is that the value of the shares can only go up from there, so early investors get a chance to buy stocks at a lowest possible price. This is extremely important as it opens a lot of return of investment opportunities to the buyers.
And it’s not unheard that shares of a specific IPO company skyrocket days after the public offering. The perfect example for this is the Indian company Zomato, which received a $1 billion evaluation after their IPO.
After the IPO, you as an investor can choose what you will do. If the price skyrockets straight away, you might want to sell the stocks that you bought immediately and collect profit. But, if you are patient enough and really believe in a project in which you invested, then you might want to wait a bit more and play it risky. The company might become even more profitable and in a few years time, your initial investment might multiply dozen times.
Companies also love IPOs. We could say that many companies just want to come to the point where they are eligible for public offerings. This means that they can collect even more funds for future growth. With IPOs, companies can collect vast amounts of money for development. For example, Indonesian company Bukalapak which raised over $1.5 billion in its IPO, which was more than enough for it to become the leader on the market.
But, as with everything, there are certain drawbacks of IPOs that you should be aware of if you're thinking of investing in them.
Drawbacks of IPOs
The unpredictability of the business and its growth is the major risk of investing in IPOs. Although it's possible that the business may become the next Facebook or Amazon, that's not always the case.
The price of the stock can often increase if the firm has potential, but only one out of, say, a million cases, gets to soar and multiply your initial investment by one hundred or more. Let's face it, the likelihood that you'll get to ride this unicorn is low (but we're not saying it's impossible).
Speaking about unicorns, there are a few that ought to be mentioned that have recently gained popularity and will continue to do so. For instance, Weber in the US was valued at an astounding $8 billion before going public. The last several years have seen a record number of IPOs worldwide, but it's critical to remember that unicorns are sporadic.
You should also consider the danger that you can't always predict how many stocks you'll be able to purchase. There is no cap on the number of applicants for the equities because the initial public offering (IPO) procedure is subscription-based.
In the end, the stocks are distributed among the investors based on the overall number of investors, which can leave you with less equities than you had anticipated.
Best IPOs in 2022
Every year is specific in terms of IPOs, and many new companies emerge out of nowhere. You need to act fast and know when the IPOs for those specific companies are taking place, in order to be first in the lane and get the most stocks you can.
Although it can be hard to anticipate which company will have an IPO and the exact time when it will happen, we will try to give you some hints that you can use however you want (remember that we don’t give financial advice).
When Stripe received a valuation of $95 billion in its Series H investment round in April 2021, it became the most highly valued venture-backed private firm in the whole world.
John and Tom Collison, two brothers who are currently in charge of Stripe, created the company. Recently, John said that the corporation was "extremely thrilled" to be private. He won't likely be the only one making the choice, as numerous investors dispersed over various rounds are likely to want to cash out at some point.
With its own transaction fee added, Stripe currently processes close to $3 billion for every $100 billion in transaction value. Growth in the previous year was 70%. It might not occur in 2022, but if it does, be prepared for it to be the greatest IPO ever.
One of the most anticipated IPOs of 2021, Instacart, never materialized because the founders felt it was more crucial to "concentrate on expansion" and "broadening its offerings." Again, there's a significant likelihood that they reconsidered after seeing how other initial public offerings perform.
However, the company's revenue growth, which surged during the epidemic and is anticipated to increase by another 10% in 2021, indicates that there is still a long way to go before an IPO is necessary. Additionally, the firm is in charge of a staggering 75% of supermarket transactions made through third parties in the US. But, you should expect that the IPO happens sooner rather than later.
The most recent fundraising round valued Databricks at $38 billion. It is the first platform that enables users to conduct conventional SQL analytics and business intelligence (BI), together with data science and machine learning, all on the same platform without the usage of a SQL manager. It was founded by the developers of Apache Spark.
Its predicted revenue of $421M in 2021 makes the $40B value seem exorbitant, but the company's growth has been incredibly strong, increasing ARR by 75% in the previous year, which is the statistic that everyone evaluating SAAS firms concentrates on.
With a $40 billion valuation, this IPO may wind up being the largest of the year, surpassing Stripe and Instacart if their listings are again postponed.
Why should you consider buying IPOs
The world of IPOs is very big and complex, and believe us when we say that we only scratched the surface. There is so much more we could cover, and if you're contemplating investing in IPOs, you will surely have to do a lot more research.
In any case, investing in IPOs can be a huge opportunity for you as an investor. If you choose wisely, the company you invested in might become the next Tesla. But, at the same time, it might be a total disaster. This is why IPOs are considered to be high risk - high reward stocks, and before investing you should always take everything into consideration.