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Let's review the basics of an IPO:
- An initial public offering (IPO) is the first sale of stock by a company to the public.
- Broadly speaking, companies are either private or public. Going public means a company is switching from private ownership to public ownership.
- Going public raises cash and provides many benefits for a company.
- The dotcom boom lowered the bar for companies to do an IPO. Many startups went public without any profits and little more than a business plan.
- Getting in on a hot IPO is very difficult, if not impossible.
- The process of underwriting involves raising money from investors by issuing new securities.
- Companies hire investment banks to underwrite an IPO.
- The road to an IPO consists mainly of putting together the formal documents for the Securities and Exchange Commission (SEC) and selling the issue to institutional clients.
- The only way for you to get shares in an IPO is to have a frequently traded account with one of the investment banks in the underwriting syndicate.
- An IPO company is difficult to analyze because there isn't a lot of historical info.
- Lock-up periods prevent insiders from selling their shares for a certain period of time. The end of the lockup period can put strong downward pressure on a stock.
- Flipping may get you blacklisted from future offerings.
- Road shows and red herrings are marketing events meant to get as much attention as possible. Don't get sucked in by the hype.
- A tracking stock is created when a company spins off one of its divisions into a separate entity through an IPO.
- Don't consider tracking stocks to be the same as a normal IPO, as you are essentially a second-class shareholder.
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