If a person was at least a little interested in trading on the financial markets, he probably heard the mysterious abbreviation - IPO. Igor Shavrov, an expert and well-known Ukrainian lawyer who manages the Shavrov and Partners law firm, explains in detail what this is:
"IPO (Initial Public Offering) is the initial placement of securities on the stock exchange. This is an IPO. In this way, they attract additional finance for business development. After appearing on the stock market, the organization turns from private to public. Anyone who has access to the trading platform can purchase its assets.
Why do companies go to IPO? The main reason is money. This is one of the ways to attract multi-million dollar investments. The second reason is reputation. If the securities are listed on a well-known stock exchange, it means that the company is solid with good financial performance. The third reason is fame. To declare an Initial Public Offering is the same as conducting an advertising campaign.
The fourth reason is transparency. Regulatory bodies monitor the activities of joint-stock companies, thanks to which the company receives a higher rating."
Igor Shavrov also explains whether it is possible to earn money with the help of IPO not only for company owners, but also for ordinary Ukrainians.
"In order to buy shares at an IPO in Ukraine, you will need start-up capital - traders recommend a minimum sum of $5. Then you should contact a broker (a natural person does not have the right to trade independently on the exchange platform). The specialist will open an account and wait for a good offer to appear. In order not to miss a profitable deal, it is better to first conclude an agreement with a brokerage company and only then look for assets for investment, and not vice versa.
The main advantage is the opportunity to purchase the assets of the desired enterprise. As soon as securities hit the stock exchange, anyone can buy them (if they have money and a broker).
The main disadvantage is that the value of securities may collapse, and the buyer will lose everything. The main risk is represented by small and little-known firms. Also, these are startups created with the help of venture capital investments and spent all the money before hitting the stock market. It happens that the whole business is just a bubble, and securities are issued for the sake of quick enrichment.
Every small investor who bought at least 100 shares (minimum lot on the NYSE) on the stock exchange becomes a full shareholder of the company and falls under the influence of the securities law and under the protection of the securities commission (in the USA - SEC). This gives him the right to complain to the company at any time if he sees in its activities a violation of his rights as a shareholder." Maksym Shavrov said.
Also, the specialist provides an algorithm of actions necessary for an ordinary person to take part in the IPO. Variantov will buy shares before the company's IPO, there may be a few - it all depends on financial opportunities.
"The first option. Buy shares at the PreIPO stage from shareholders.
An opportunity to buy shares before the company went on IPO. As a rule, it is possible to buy blocks of shares from shareholders who want to sell part of their share. But the minimum amount for entry in this case starts at $1 million.
Also, in addition to a rather large minimum threshold for entry, it usually still requires efforts from your broker to negotiate with shareholders and venture capital funds to sell you a stake. And it is absolutely not a fact that they will sell it to you.
The second option. Buy pre-IPO shares on the NASDAQ Private Market.
With the appearance of the NASDAQ Private Market online platform in 2013, the situation became a little more democratic and accessible. Today, there are many different online platforms that are banking applications.
Online brokers become partners of the platform and offer their clients stock packages that are offered by project shareholders on the secondary market before the company's IPO
Option three. Buy pre-IPO shares from your broker.
Brokers can cooperate with venture capital funds that invest in companies at the early stages, and then resell their shares in parts.
Often there is a lock-up on share trading prior to the IPO. Then the funds, through your broker, can offer clients "units" or forward contracts, which will give the right to exchange them for shares of the company after the IPO in a ratio of 1 to 1.
However, of course, there are pitfalls. Igor Shavrov also warns about the possible risks of investing his funds in the IPO.
"The main risk of "running out of pants" is a price collapse after the IPO. This can happen due to an unfavorable trend in the market as a whole. After all, the markets are volatile, and when the company started preparing for the IPO, 6-8 months ago, there could be an upward trend, and during the IPO, the markets could be in a pessimistic mood.
Also, theoretically, prices can fall if some major player decides to sell his shares or short them (this is the so-called short sale, aimed at making money on falling prices).
For example, in November 2013, the American stock market was quite optimistic and grew by 4% in a month, but the shares of the Twitter company, which went on IPO on November 7, collapsed by 13% in the first month.
It is necessary to remember that the shares are not covered by state guarantees - this is the main risk, plus it is necessary to work only with licensed companies. All financial companies are controlled and licensed by the state. This makes it possible to avoid fraud." Igor Shavrov concluded.
More information and useful videos — on Igor Shavrov's YouTube channel The Zakon.
