The first article in KingsCrowd’s initial public offering (IPO) investing series is an overview of IPOs. It covers the mechanics of an IPO, some of the reasons why companies go public, and more. In this article, we’ll dive deeper into the advantages and disadvantages of investing in an IPO.

IPOs are significant milestones in most companies’ lifecycles. IPOs grant companies access to the public markets, thus providing capital that companies can use to expand their operations. While the fanfare around an IPO can be exciting, investors should carefully consider the advantages and disadvantages before investing.

Pros of Investing in IPOs

Investors could get in early on high-growth companies. IPOs represent the first time the general public can invest in innovative, high-growth companies.

Investing early could yield long-term rewards. Investing at the offering price or at the IPO can potentially grant investors the opportunity to reap massive returns on their investment. Consider CrowdStrike. CrowdStrike opened its IPO at an offering price of $34 in June 2019, and its stock price climbed to more than $151 on May 10, 2022. Investing at the IPO price would have netted investors massive gains.

Investors could buy equity at the best possible price. The opportunity to invest at the offering price via Robinhood, SoFi, and other platforms allows investors to get in at what can be the best price before an IPO’s price shoots up. 

In the CrowdStrike example, the company priced its offering price at $34. The first day it was available on the Nasdaq, the company’s shares jumped 97% to $63.50. At nearly half the price, early IPO investors clearly got the better deal in this case.

Cons of investing in IPOs

IPOs are risky. Because IPOs are the first time the general public can invest in a company, the price may be pushed upward. IPO prices pushed up by the public are likely overpriced and will probably fall to a price at or even below the IPO price. 

Public companies are generally highly scrutinized. As such, unprofitability and other unfavorable facts about an IPO’s detailed financials may affect the company’s value.

IPOs are highly volatile. IPO lock-up periods, financials, and more can affect a company’s post-IPO price. Lock-up periods inevitably cause a drop in share price after they end. Since IPOs are newer, untested companies, their prices will fluctuate often. 

Facebook went public at a price of $38 in 2012. Its price dropped to $17.58 in September the same year and didn’t climb back to its IPO price until July 2013. On May 10, 2022, Facebook’s stock price reached a high of  $202. This shows that any IPO can be unpredictable, including companies that become huge successes.

Investing in IPOs can be time consuming. Because IPOs can be risky and volatile after going public, investors should perform due diligence on the company thoroughly before investing. This means investors should read the entirety of the Form S-1, research the industry and the competitors, and thoroughly understand the company’s product or service. 

Moving Forward

It’s clear that IPOs are high-risk investments with potentially high returns. IPOs can give investors in the general public access to high-growth investment opportunities at ideal prices. However, IPOs are also unpredictable. Investors should properly conduct due diligence for any investment, but IPO due diligence is time consuming.