You know how when you're a VIP customer for a particular brand, you sometimes get priority access to new product launches? Well, investing in an IPO (that's Initial Public Offering) is a bit like that. It's a chance to get your hands on a company's shares before it hits the big, bustling stock market scene.

Although this sounds thrilling, it might get you thinking, “What is an IPO exactly?” and “How can I start investing in one?”

This article will help you understand the ins and outs of an IPO. We'll cover the basics of IPOs, how they compare to stock investments, reasons to invest, plus how to invest in an IPO. You'll also get insights on real-life IPO case studies. Now, let's get to it.

What is an IPO?

"IPO" stands for "Initial Public Offering". In simple terms, it's like a company's grand debut on the stock market. Before this big debut, the company was like an exclusive club, with only a few people owning large pieces of it. An IPO throws open its doors for everyone to come in and own a tiny slice of the company.

But what's the idea behind a company's decision to go public and have an IPO?

Why does a company go public?

The IPO process is a big milestone for any company. Here are three simple reasons why companies decide to open themselves up to public ownership.

1. Raising money : The biggest motivation! By selling shares (or pieces) of their business in the form of IPO stock, they get a financial boost. This money can help them expand, hire more people, or invest in research and development.
2. Public spotlight : Being publicly traded means more people know about you. Think of it as getting a spotlight from the ASX (that's the Australian Securities Exchange). More visibility often means more business, more customers, and even more partners.
3. Rewarding the team : The folks who first invested in and supported the company in its startup phase (often called "institutional investors") may want to cash in on their hard work. Going public offers them an opportunity to sell their shares at a sweet price, rewarding them for taking a chance on a new company.

These are just a few of the more common motivations a company has in going public. Once they are convinced that having an IPO is their next big step, the following question is “How can a company go public?”.

How does a company go public?

Okay, so we've established that the private company wants to go public. What comes next?

Step 1: Partnering with an investment bank . The company teams up with an investment bank. These are the brains that help the company figure out all the nitty-gritty details, including setting the share price - that's the cost to buy a little slice of the company!

Step 2: Preparing documents. Then, there's a lot of paperwork. This includes documents that provide details about the company's finances and plans. It’s a way of introducing the company to potential investors.

Step 3: Setting the IPO date. Once everything is in place, a date is set for the IPO. The IPO date is then announced so everyone knows when they can start buying shares.

Step 5: IPO hits the market. Here comes the fun part! On the big day, the IPO hits the market. It’s like a grand opening, but for shares. This is when you can start to buy shares if you’re interested.

Step 6: The company becomes publicly traded. After the IPO, the company is listed on a stock exchange like the Australian Securities Exchange (ASX). It's officially hit publicly traded status - this means anyone can buy a part of the company and potentially share in its success.

When a company decides to have an IPO, it’s their way of inviting more people to be a part of their story.

While there's a whole lot to the IPO process, it's all about giving investors like you a chance to hop on board. So, the next time you hear about an upcoming IPO or see a company going public on the Australian Securities Exchange, you'll know exactly what's going on.

What's the key difference between IPO and regular stock investments?

A company having an IPO may be a bustling and vibrant time filled with lots of buzz and opportunities to invest. But there's also another quiet yet bustling lane in this market. It's a lane in which you can pick stocks that have been around for a while.

Let's break down their key differences so you can decide which investment type is best for you:

	IPO	Regular Stock Investment
What is it?	An IPO is when a company decides to sell its shares to the public for the very first time.	Regular stock investments involve buying shares of companies that have been publicly traded on the stock market for a while now.
Who's involved?	During an IPO, an investment bank usually teams up with the company to help set things up. They're like the backstage crew for a big show.	For regular stocks, it's mainly the company and the investors, with brokers facilitating the buy and sell actions.
Getting your hands on them	To access an IPO, you'd typically need to register your interest through an IPO application. This can be done via an app or online platform, depending on the offerings from brokers or licensed financial advisers.	Regular stock investments are simpler to buy. You just choose the ones you want and buy them, usually through the same platforms but without the need for an application process.
Understanding the risks	IPOs can sometimes be a bit unpredictable as there isn't a lot of historical data to base your decisions on. This means you may need a higher risk tolerance to invest in an IPO.	Regular stocks, however, have more data available to help you make an informed decision.
Market playground	IPOs make their grand debut on stock exchanges like the Australian Securities Exchange (ASX), marking their entry into the big league.	Regular stocks have been playing in this league for a while, and you can easily access and buy these stocks on the secondary market. This is the part where understanding the stock market becomes much more worthwhile.

Now, whether you decide to invest in an IPO or go for some established stocks, always keep in mind your risk tolerance. This way, you can create an investment strategy that is unique to your investment preferences and goals.

Why would someone invest in an IPO?

With the various investment types available out there, you might be wondering about the allure of getting your hands on IPO stock. Here are some reasons someone would want to invest in an IPO:

1. First in line : Getting in on an IPO means you get to buy shares at the IPO opening price. That's the very first price it's sold at, and sometimes, these shares can jump in value shortly after.
2. Growth potential : Many companies that have an IPO are often young and looking to grow big. If they do well, their share price could rise, which means the value of your investment could grow too. It's like planting a seed and watching it bloom.
3. Exciting opportunities : Investing in an IPO allows you to join a company's journey at an early stage. You're not just investing in any stock; you're backing a fresh idea or a new venture.

Case Study: Spotify's IPO

For many of us, when we want to jam out to our favourite tunes, we turn to the Spotify app. It was back in April 2018 that Spotify had its big moment and went public through an IPO. Instead of the usual dance of using investment banks, they took a unique route called a "direct listing." This meant they let their shares float directly on the market.

Guess what? It was a hit! Their share price started strong, and because they sidestepped the traditional IPO process, they saved a good chunk of change. For investors, this was music to their ears because they could buy shares without the usual first-day price jump.

What are the risks of investing in an IPO?

Now, while it's pretty exciting to be one of the first to buy shares from a company, there are a few things you might want to keep in mind.

1. Lack of history: With an IPO, you're often diving into uncharted waters. The company is new to the public market, and that means there isn't a lot of data or past performance to guide your decision.
2. Hype train : Everyone might be talking about this new IPO, which can drive up the price. But sometimes, the real value of the company isn't as high as the price suggests.
3. The early rollercoaster: After the IPO, share prices can swing up and down like crazy. This isn't for the faint-hearted! If you're someone who likes things steady, this might keep you up at night.

Case Study: WeWork's IPO

Back in 2019, WeWork was gearing up to have their big moment with an IPO. A lot of investors were keen on getting a piece of this company that provides shared office spaces. Despite the high anticipation, things didn't quite go as planned. A bunch of concerns started popping up about the company's business model and leadership. Because of this, the share price that was initially set started to look a bit too high. In the end, the offering was pulled off the table.

It just goes to show that not every IPO is a guaranteed success. It's a reminder to always do your homework before jumping into buying IPO stocks, and keep your risk tolerance in mind.

How can I invest in an IPO?

Do you think you're ready to explore the vibrant territory of IPOs? It's not as complex as it might seem at first glance. Although investing in an IPO is typically for institutional investors, getting involved in an IPO is something individual investors can consider.

Here's a step-by-step guide through the IPO process:

Step 1. Stay updated on upcoming IPOs : Keep an eye out for upcoming IPOs. There are plenty of websites and apps where you can see which companies are planning to go public soon.

Step 2. Choose a broker : Before you can buy shares in an IPO, you'll need a broker. Someone who can help you buy the stock you want. Make sure your broker is licensed and provides access to IPOs.

Step 3. Apply for the IPO : Once you've picked an IPO you're interested in, you can apply or register interest through your broker. This is the IPO application process.

Step 4. Set your budget : Decide how much you want to invest. Remember, shares have a price, so think about how many shares you want and can afford.

Step 5. Wait for the offering : After the IPO application, there's usually a waiting period. During this time, the investment bank and the company set the IPO opening price, which is the cost of each share when they first go on sale.

Step 6. Buy the shares : Once the IPO hits the market, and if your application is successful, you'll can buy the shares at the IPO opening price.

Step 7. Track your investment : After buying, the company becomes publicly traded. This means you can track how your shares are performing in the secondary market, which is where investors trade stocks after the IPO.

As you keep learning and growing, always remember to think about your risk tolerance. It pays to ask yourself whether buying specific companies is the right move for you, especially as a long term investor. The world of IPOs is a bustling marketplace full of opportunities. So, keep your eyes peeled for the next big thing. Who knows? Maybe you'll get a piece of the action!

How to invest in an IPO — the wrap-up

As you venture to invest in an IPO, gear up with the right knowledge. Think of this journey as like planting a seed and nurturing it to grow. Keep your risk tolerance in mind and don't hesitate to seek the help of a licensed financial adviser if needed.

Whether it's on the ASX or any other stock exchange, the world of IPOs is at your fingertips. Much of investing is about learning and having a bit of fun along the way.

Happy investing!