Investing in IPOs (Initial Public Offerings): Finally available to all
IPOs are succulent investment instruments that until recently were only available to institutional investors and large private funds. The rules of the game have changed. Now, any retail investor can benefit from these investment vehicles.
You may not be familiar with the term “Initial Public Offering” (IPO), but we will tell you that it represents a potentially lucrative opportunity to invest in various companies before they go public.
In this article we will enter fully into the IPO universe. You will learn what they are, what they are for and how to take advantage of them in your investment strategies. You will also be able to see for yourself the results of the most recent IPOs.
And that’s not all, as you’ll learn first-hand which IPOs will be coming to market in 2022.
“For the first time, participation in IPOs is available to retail investors.”
Many investors seek to participate in IPOs but are limited by their own broker. Moreover, these offerings remain concentrated in the hands of institutional players and private funds, but those limitations have ended with Freedom24 from Freedom Finance, a European investment platform that has succeeded in democratizing IPOs.
For the first time in Europe, participation in IPOs is available to retail investors through the aforementioned investment platform, which enjoys an excellent reputation and is duly regulated by multiple European and American regulators. (At the end of the article we tell you all the details so that you can take advantage of this unusual opportunity).
What is an IPO or Initial Public Offering?
An IPO refers to the process by which an unlisted private company offers its shares to the public through an issue of shares in the primary capital market.
It is worth noting that during the IPO an initial price is set and the shares are traded. However, it is after the IPO date that these securities are allowed to be freely traded subject to certain time restrictions for those who purchased the initial offering.
To qualify for IPO, a company must comply with all the financial and legal requirements of the respective stock exchange where it aspires to be listed, as well as those of its regulatory body.
For example, a company that aspires to be listed on the NYSE must comply with the requirements of the NYSE, as well as those of the SEC as its regulatory body U.S. Securities and Exchange Commission (SEC) as its regulatory body.
This process can take several months and requires the company to hire an underwriter, usually an investment bank. The underwriter performs the valuation of the company, estimates the initial price, the number of shares, the IPO date, generates interest, attracts demand and trades the offering.
What is an IPO for?
An IPO is a mechanism that allows a sufficiently mature private company to raise capital to finance its long-term expansion and growth.
For many analysts, this maturity is reached at valuations in excess of $1 trillion. So not just any company can go public overnight.
However, there may be cases of companies with valuations below that figure that compensate with their tremendous profit potential.
There are other mechanisms for raising funds, however, IPOs are one of the most advantageous for companies.
An IPO also allows the founding members and original investors to recover the capital placed in the company through the partial or total sale of their shares.
This can be done after the IPO, after a period of time set by the authorities called “Lock-up Period “.
During this period, these privileged shareholders and others determined by the authorities may not sell their shares on the market for the sake of transparency and price stability.
How to invest in an IPO and profit?
IPOs can produce significant price movements upon IPO, which can be an opportunity to realize large profits, although it also involves the risk of losing money as is the case with any investment.
8 basic recommendations for investing in an IPO
1. Carefully reviews the company’s prospectus
All critical information should be studied carefully, particularly short- and medium-term sales prospects.
2. Identify direct competitors of the IPO target company
Look at your stock price and market capitalization, as these will be key aspects to compare. If the exit price is excessive, the market may discount value and the price may drop significantly.
3. Be aware of the Lock Up Period
Remember that many institutional investors will put money into IPOs and may take profits at the end of this period as well as insiders, causing the price to fall sharply, especially when the market value is deemed to have gone too far from the intrinsic value of the business.
4. Define an investment strategy according to your characteristics and risk profile
If you are going to trade in the short and medium term, we recommend being aggressive and taking profits in the face of gains of 100% to 200%. Institutional investors will do this without hesitation.
If you are trading long term and your investment is profitable in the first weeks or months, do not exit the market unless there is a fundamental trend change in the stock.
Remember that the market moves in cycles of optimism and pessimism, so if your stock starts to decline you may consider liquidating your position at a profit and buying back a larger amount at a lower price if there is real upside potential.
5. Make an adequate monetary management of your capital
Do not commit too high a percentage of your funds to a single trade. You should leave a margin in reserve to be able to withstand adverse movements.
If you are going to participate in an IPO, define the maximum loss you are willing to accept in order not to compromise your long-term capital. It is not easy to define, but you should consider it in your risk management.
If in an offering the stock turns against you early on, take a reasonable loss quickly and reassess the situation when the price stabilizes. Perhaps the stock has real potential but the exit price turned out to be too high.
6. Combine technical analysis with fundamental analysis to monitor the stock
Use trend analysis and indicators such as MACD and Volume in conjunction with fundamental analysis based on the core aspects of the company and its competitive environment.
7. Participate in those IPOs that have the highest potential due to the nature of the business model
Evaluates whether the company shows palpable competitive advantages that will ensure it maintains or even increases its market share. Monitors the release of new products and services.
8. Considers the general context of the economy and its more immediate prospects
This is a very important filter for making the decision whether or not to participate in an IPO. Sometimes it may be better to wait for turbulent periods to pass in order to buy at better prices.
Benjamin Graham as the father of the value investing philosophy stated among his maxims that an intelligent investor is nothing more than a realist who sells to optimists (at highs) and buys from pessimists (at lows).
So there is no reason not to capitalize on significant profits in the short term. And if the stock does not perform, there is also no reason to hold a losing position for too long.
More recent IPOs: what does the empirical evidence tell us?
“The average price growth of the IPOs offered by Freedom24 once the lock-up period is over is +59% as of January 10, 2022.”
In order for you to appreciate the profit potential Freedom24 offers you through participation in upcoming IPOs, we will look at some case studies based on companies that went public in 2019. On a statistical level, the average growth in the share price of the IPOs offered by Freedom24 after the lock-up period is over is +59%, as of January 10, 2022.
Below we take a look at the weekly candlestick, volume and MACD chart for the NASDAQ-listed plant-based meat products company’s stock.
The chart covers a time span of two and a half years from its IPO to the present.
The IPO price was set at $25.00 per share and the IPO was finalized for May 01, 2019, so from the initial week itself it materialized significant gains.
At the end of 13 weeks in July of that year the price reached a high of $239.71; an impressive 858.8% gain.
As is natural in these cases, the end of the lock-up period implies important adjustments in the price as insiders and institutional investors can liquidate positions to take profits.
This is why it is recommended to be aggressive and consolidate profits as the stock begins to pull back after the lock-up. With such a gain, an investor could wait for the price to stabilize and buy back more shares.
During the Covid-19 pandemic the price reaches a low of $48.18 in March 2020. A reasonable price to enter again. The company reached a high of $197.50 in October of that year, which would have meant interesting gains again.
In fact, volume was showing above-average participation and MACD a bullish divergence.
The company makes a new high of $221.00 in January 2021, but then the price starts to decline steadily to date with low volume and a bearish divergence in the MACD. During the January 20, 2022 session, the price reached $63.49 before the close.
Participation in this IPO was a success for investors who had the opportunity. In fact, the stock never returned to levels near the IPO price of $25. The price even reflected support near $40 per share.
A flexible approach to investing involves taking profits on winning trades when necessary.
Those investors who participated in the IPO and have kept their position open so far are gaining 153.9% judging by the latest price, but missed two opportunities to take even bigger profits to buy more shares at relative lows.
We now look at the weekly candlestick, volume and MACD chart for the NYSE-listed ride-hailing services app company’s stock.
The IPO price was set at $45.00 per share and the IPO was finalized for May 10, 2019.
However, in this case the share price has trended lower, and this combined with the Covid-19 pandemic took UBER to lows of $13.71 in March 2020, for a disappointing 69.5% loss from the IPO price.
Zachs Investment Research attributes this behavior to the fact that this company had already received huge amounts of capital while it was still private. So it was already relatively well funded.
Certainly, those investors who at this point opened buying positions on the back of the stimulus plans and superexpansionary monetary policy were able to acquire this stock at a price probably much lower than its intrinsic value.
The company reaches a peak price of $64.05 (+42.3%) in February 2021 to again drop below the IPO price twice. So this business model has yet to clear some doubts for investors.
The stock is currently trading on low volume and in negative MACD territory.
Other IPOs of interest: Zoom, Pinterest, Levis, Lyft…
Other major companies held IPOs in 2019 and some of them show formidable results as of January 20, 2022:
Zoom Video Communications (ZM), an information and communications technology company, launched an IPO price of $36.00 and was trading at $155.81(+332.8%) at the time. However, it reached a high of $588.84 in October 2020 (+ 1,535.7%).
Tradeweb Markets Inc (TW), an electronic services company for trading platforms, launched an IPO price of $27.00 and was trading at $91.15 year to date(+237.6%).
Pinterest Inc (PINS), an interactive media services company, launched an IPO price of $19.00 and was trading at $31.94 (+68.1%). However, it peaked at $89.90 in February 2021 (+181.5%).
Levi Strauss & Co (LEVI), an apparel and textile company, launched an IPO price of $17.00 and was trading at $21.27 (+25.1%). It reached a high of $30.84 in May 2021 (+ 81.4%).
Upstart Holdings Inc (UPST), an AI-powered cloud lending company, launched an IPO price of $20.00 and was trading as of January 21, 2022 at $92.72 (+ 363.6%). However, it peaked at $401.49 in October 2021 (+ 1,907.5%).
Bioatla (BCAB), a biopharmaceutical company developing cancer treatments, launched an IPO price of $18.00 and was trading year to date at $10.07 (- 44.1%). However, it reached a high of $76.63 in March 2021 (+ 325.7%).
(DLO), a company that operates a global payments platform, launched an IPO price of $21.00 and was trading year to date at $25.43 (+21.1%). However, it reached a high of $73.43 in August 2021 (+249.7%).
The last two cases are evidence that a flexible IPO investment approach should be managed: you should pay yourself as the market puts money in your pocket.
There are also cases with unpromising results such as the company Lyft Inc (LYFT), specialized in ridesharing services, which launched an IPO price of $72.00 and was trading at $37.60 (- 47.8%).
But this is part of the nature of investing and its inherent risks. However, the potential returns if invested from the IPO can be considerable, as we have seen in this section.
want to know which are the most exciting companies to go public in the near future? Here is a small sample.
Starlink offers high-speed Internet services via satellite, even in the most remote locations on the planet. A significant number of satellites have already been placed in orbit and it is estimated that its network will consist of some 4,000 satellites when completed.
This huge project was announced by Elon Musk in 2015 and has privately raised more than $10 billion, but requires much more investment.
Therefore, Musk indicated in 2020 that the Starlink IPO is necessary, although it depends on the performance of the company and its indicators to materialize.
By 2021 Starlink had a capitalization of $72 billion and a planned investment of $20 billion.
Tik Tok’s parent firm, ByteDance, has created Tik Tok Global to adapt to sanctions and regulations on Chinese technology companies.
This new firm already has all the rights and the source code of the application to be able to work in the U.S. under the new rules.
Tik Tok already has some 200 million users in the US alone. in addition, the possibility of running campaigns and advertisements through the platform is open. So the potential for revenue generation is enormous.
As part of the new rules, Oracle and Walmart acquired the shares of the new company and the board positions are held by US citizens. The preliminary valuation of Tik Tok is $50 billion.
Stripe, an online payment service with thousands of customers worldwide.
Chime, one of the largest digital banks in the US.
Databricks, a company that provides data warehousing and platform services for artificial intelligence applications.
Impossible Foods, a company that produces plant-based vegan products for a growing niche market.
If you want to learn more about IPOs, you can do so through Investing.com, in the section IPO Calendar. Alternatively, if you create an account at Freedom24 (https://freedom24.com/ipo), you will receive free alerts every time a new IPO is launched
Why invest in IPOs with Freedom24?
When choosing a broker you look for 5 crucial elements to make the decision to open your investment account with them.
These elements are security and reliability, a low commission policy, a good platform, a broad product portfolio and excellent customer support. Freedom Finance through its Freedom24 platform offers you great advantages in these 5 elements:
Security and regulation
Freedom24 is a company of Freedom Finance Europe Ltd., the European subsidiary of Freedom Holding Corp. the only European investment and trading platform listed on NASDAQ (FRHC).
It reports to 3 regulators: the Federal Financial Supervisory Authority (BaFin) of Germany, Cyprus Securities and Exchange Commission of Cyprus (CySEC) and the U. S. Securities and Exchange Commission (SEC) of the U. S. In Spain Freedom24 is registered with the Comisión Nacional del Mercado de Valores, with registration number 4547 and licensed to offer investment services throughout the European economic area. It also has offices in Germany, Spain, Greece and Cyprus.
Its high regulatory standards, coupled with its unique range of investment products, makes Freedom24 one of the fastest growing investment and trading platforms in Europe with more than 400,000 clients.
Freedom24 is currently offering a promotion of 0% commissions on your trades for 30 days.
You then switch to the account type of your choice from 3 different plans: Smart, Fix and Super, which are tailored to the transactional profile of the investor. In the most “expensive” plan, the commission per share purchase is only 0.02€.
In conclusion, its commissions are extremely low compared to other European brokers.
The Freedom24 platform allows you to open your investment account in just a few minutes and deposit funds by credit card or bank transfer without commissions.
You can trade for free via web terminal 24/7. It also has an excellent mobile application.
Its interface is simple, clean and intuitive to open positions and you can also view investment charts. It has an orientation for medium and long term investment, rather than for intraday trading. The ease of use of its platform and its intuitive design make it suitable for both novice and veteran investors.
Customer service and investor support
It offers 24/7 customer support in many languages, including Spanish (as mentioned, they have branches in Madrid, Spain). In addition, you have a customer support chat on their Freedom24 platform.
In addition, Freedom24 makes investment ideas available to you for free every week. Freedom24’s Analysis Center was awarded as the best in 2020 by Global Banking and Finance Review.
Product portfolio and investment in IPOs
You have access to over 1,000,000 stock assets including stocks, ETFs, bonds, futures and options on the world’s most important exchanges. In other words: it is an extraordinarily broad portfolio of investment products. In addition, it offers an interest-bearing account with an annual interest rate of 3%.
Its flagship product is the IPO or Initial Public Offering, being the only European investment and trading platform that allows you to participate in them from only $ 2,000.
With this long-awaited product you are on a par with institutional investors, you no longer have to wait in line. The possibility to earn up to 3-digit returns is within your reach.
Important: the allocation of shares in IPOs at Freedom24
It is important to mention that at Freedom24 each client has a maximum allocation of shares that can be acquired in an IPO. As this is an exclusive product with limited availability, the platform must set purchase limits. These limits are calculated according to the “rating” of each client, a scale that is transparently established based on the portfolio and level of activity.
The larger and stronger your investment portfolio and the more active you are on Freedom24, the better your client rating will be. This way you will get a higher allocation of shares in IPOs.
In other words, if you want to get a high allocation in the next IPO, it is important that you register early with Freedom24 and keep your account active (in your profile you will be able to monitor your client rating at all times and know what allocation you will get for the next IPO).
For all the above reasons we think that Freedom24 is an excellent alternative to invest. The possibility of participating in IPOs is undoubtedly the jewel in the crown.
It only remains for you to choose the companies with the most potential and apply the recommendations we have given you to obtain profits in these operations, previously only available to institutional investors and large investment banks.