If you’re just starting to delve into the stock market, anything relating to prime brokers, quarterly snapshots, or initial public offerings might understandably be a bit overwhelming. To help you understand one aspect of stock trading, here’s a little breakdown containing some IPO information to get you started:
What exactly is an IPO?
IPO stands for initial public offering. It describes a process wherein a company first starts selling its shares to the public. When you hear about a company “going public,” that’s the same thing.
So why would a company go public?
There are several reasons why a business wants to go public. One main reason is to raise money for future expansion. If a company wants to expand the business but doesn’t have enough profits to expand rapidly, going public can raise money to increase production, development, or research. This capital could also be used to pay off any existing debts the company has.
Another reason a company goes public might be for founders or venture capitalists to take their exit from the company — or to make money from share profits. Many times, founders will sell their shares but will keep their stake in the company. When Facebook went public, founder Mark Zuckerberg sold over 30 million shares of the company and made a little more than $1 billion.
There are several other reasons why companies might decide to go public (acquisition of other companies, brand identity, increasing the business’s value, and more). Many times, it’s a combination of these reasons.
How is the offering price of a stock determined?
Usually, this price is based on the financials of the company, what the company offers, their income stream, current market conditions, and the demand for these particular stocks. The stocks need to be issued at a fair price while keeping in mind the company’s need to raise capital. Sometimes, IPOs are delayed when market conditions are unfavorable.
Should I get in on an IPO?
It depends. IPO stocks are often bought up by big investors and other companies. Individual investors usually can’t get involved until later on. When the main reason to go public is to raise capital for the company, the IPO underwriters aren’t interested in targeting small-time investors. As an individual investor, your best bet to get access to IPO shares is to be a member of the financial institution that also serves as the underwriter for that IPO. But the odds of this happening are often slim. Even if you do get the chance to invest in an IPO company, it’s best to consider the decision carefully before you jump in. IPOs are uncertain by nature and because they have a lack of history on the stock market, you should get an expert’s opinion before deciding to buy.
So where do prime brokers come in?
Prime broker services are offered to clients who qualify — typically, top investors and institutions. They offer access to services that many other institutions may not have for their clients on-site. They may provide financing for leverage, risk management services, and other benefits.
Not everyone qualifies for a prime broker, but that doesn’t mean you can’t get involved in the stock market. Enlisting the help of a stock broker can be an immense help, as he or she can give you advice and can place trades for you. There are trading sites you can use, but if you’re feeling unsure about where to start, you shouldn’t dive in without some assistance. Knowing what shares to buy — as well as knowing when to buy or when to sell — can be confusing, so you should seek out an experienced professional. The stock market can be lucrative, but getting involved could be financially risky if you don’t have the correct information.