Initial Public Offerings (IPO) is the process where a private company first sells shares of its stock to the public, which means that the company’s ownership is transitioning from private ownership to public ownership. In an IPO, the company chooses a lead underwriter to help with the securities registration process and distribution of the shares to the public. The lead underwriter then assembles a group of investment banks and broker dealers that is responsible for selling shares of the IPO to institutional and individual investors.
When investors decide to invest on an IPO stock, the investors should follow the following process.
- Research thoroughly about the company to be invested in.
- Select a company that has a strong underwriter, such as Goldman Sachs, JP Morgan, etc.
- Consider waiting for the lock-up period to end. The lock-up period is a legally binding contract, lasting three to 24 months, between the underwriters and company insiders that prohibits investors from selling any shares of stock for a specified period. Waiting until insiders are free to sell their shares is not a bad strategy because if they continue to hold stock once the lock-up period has expired it may be an indication that the company has a bright and sustainable future.