One of the smartest and most reliable ways to hit it big is to invest in IPOs. When you buy into an IPO, you’re buying shares in a company when it first becomes available to the public. This can be a very lucrative investment if you’re patient and pick the right companies. But is it possible to turn just $5,000 into over $5,000,000?
Let’s start with a quick primer of what an IPO is…
What Are IPOs, and Why Should You Invest in Them?
An IPO, or initial public offering, is when a company sells shares of itself to the public for the first time.
IPOs are often accompanied by a lot of hype and speculation as investors try to buy shares before the stock price increases. While there can be a lot of risks involved in investing in IPOs, there is also a great potential for reward. If you pick the right companies and hold on to your shares for long enough, you could see life-changing returns on your investment.
There are many examples of IPOs that have generated incredible returns for investors. One such example is Amazon.com. Amazon went public in 1997 at $18 per share. With the company growing over 117,000% since then, an investment of $5,000 would be worth over $5.8 million today.
While Amazon is undoubtedly an outlier that saw astronomic growth along with the rise of the internet, the future looks bright for many young companies that are going public today.
How To Pick the Right IPO To Invest In
With so many companies going public yearly, it can be challenging to know which IPOs are worth investing in. Here are the top things you should look for when considering an IPO:
Is it a well-established company with a proven track record? Or is it a start-up with untested products or services?
A company’s business model is critical in determining its long-term viability and potential for growth. Some business models, like e-commerce and cloud computing, are exploding since they fit perfectly into today’s digital world and are more likely to see continued success in the years to come.
Conversely, companies with business models based on brick-and-mortar locations or physical products may have more difficulty adapting to the changing landscape.
Before investing in an IPO, you should look at the company’s financial statements.
- How much debt does the company have?
- What have its revenue and profit growth been like in recent years?
This will give you a good idea of its overall health and profitability. You should also pay attention to industry-specific metrics like same-store sales growth for retail companies, daily active users, or churn rate for tech companies.
Another essential thing to look at is the company’s management team.
- Do they have a good track record?
- Are they experienced in their industry?
A solid and experienced management team is essential for any company, but it’s necessary for young companies still trying to find their footing.
The Competitive Landscape
It’s also essential to understand the competitive landscape that the company operates in.
- How many other companies are competing for market share?
- What is the potential for new entrants into the market?
If a particular industry seems saturated with competition, it may be harder for a new company to find success.
Current Market Conditions
When considering an IPO, you should look at the current market conditions.
- Are stocks generally doing well, or are they in a slump?
- Is the overall economy strong or weak?
These factors can all affect how well a new stock will perform after it goes public. Even if a company has a strong product with a great management team, if the market conditions are not correct, it may provide too many headwinds for the stock and business to be successful.
How To Maximize Your Profits From Investing in IPOs
If you’re going to invest in IPOs, there are a few things you can do to maximize your profits:
Set a Limit on How Much You’re Willing To Lose
No investment is without risk, and that includes IPOs. Before investing, limit how much you’re willing to lose; this will help you stay disciplined and avoid making impulsive decisions if the stock drops.
Have a Long-Term Time Horizon
Investing in an IPO is not a get-rich-quick scheme; new companies must find their footing and grow into successful businesses.
When considering an IPO, ensure you have a long-term time horizon to weather any short-term bumps in the road.
Always Do a Deep Dive
Before investing in any IPO, do a deep dive into the company.
A thorough analysis includes looking at press releases, financial statements, competitor analysis, and future projections. With so much information readily available online, there’s no excuse not to be knowledgeable about the company you’re giving your hard-earned money to.
Take Profits When You Can
While having a long-term time horizon is vital, that doesn’t mean you should hold on to a stock forever. After all, profits are only realized when you sell.
If a stock has doubled or tripled in value, evaluate whether you still believe in the company’s long-term prospects and take profits accordingly. Taking your principal plus some profits off the table may help you to sleep better at night and give you dry powder to reinvest in other opportunities.
IPOs can be a great way to make money if you’re willing to take on the risk. By doing your homework and investing in companies that are likely to succeed, you can increase your chances of making a profit. Just remember always to have an exit strategy, and never invest more than you can afford to lose.