Financial education for young people šØāšš©āš
2021 saw a huge fluctuation in IPOs, mergers, and SPACs. But what does this mean for companies and how does it impact you?
Why it Matters
An important personal finance topic for young people is investingš. It allows for anyone to purchase stake in a company and experience a financial return when that company performs well through capital gains or dividendsš°(and share in the risk of losses when a company underperformsā ļø). To learn more about investing, check out our blog šø5min Guide to Investing. But as the average investor, you can generally only invest in certain companies: public companies. These are organizations that are listed on a stock exchange and issue shares that you as the investor can buy and sell at your will. So then how does a company become public? And what does a company going public mean for you as an investor?
š¤·āāļø What's Happening?
During the pandemic, there was a spike in the volume of companies going public with a record number of 1035 IPOs in 2021 in the US and 119 in the UK. IPO stands for Initial Public Offering and is typically the path a company will take to go public. A private company may decide to go public for a number of reasons, but the main motivation is usually to raise capital šµ. By offering or selling shares in their operation, a company can get an influx of cash to fund growth projects, cover debt, and more. In most cases, an IPO is a sign that a company is growing. When a company decides they are going to do a traditional IPO, they will hire an investment bank š¦ and other professionals and prepare for a rigorous process that will analyze the company and help to determine the price the shares will be sold for.
While the traditional IPO is the most well-known way of going public, there are a few other options companies have including direct listings, SPACs, and more, such as reverse mergers or spinoffs. Through the direct listing process, a company avoids bringing on many of the professionals, and their associated fees, required in a traditional IPO. Instead of offering new shares, it allows privately held stock (stake held by employees, private investors, etc) to be bought and sold by the public.
SPACs, which stands for Special Purpose Acquisition Company, became a popular option during the pandemic. In this situation, the SPAC goes public as a company without any specific business operations, or a shell company. It will raise funds through an IPO and then use that money to acquire or merge with a private company. This can make the IPO process faster for a private company, but as the investor, you should remain wary as there may be less transparency or regulation.
As an individual investor, you may face some requirements if you want to participate in an IPO directly, and this is considered to be a relatively risky investment. However, you can keep an eye out for company news or look up an IPO calendar š for companies that are going public that you may be interested in and may want to track. You can add these companies to your watchlist, see how they perform, and decide if you would like to invest. You can also keep up with GenMoneyās Market Mondays for key news and updates on publicly listed companies and their stocks!
Key Takeaways for You
š§As an individual investor, you primarily have access to trade public companies
Because these companies are the ones you will primarily be investing in, it is important to understand how they got there and how new ones will come to be listed.
2. šļøThere are several reasons and ways for a company to go public
Depending on a companyās resources and goals, they may choose different paths to go public. This may be a useful indicator to you as the investor when deciding if the company aligns with your investment goals.
3. š¤Investing in IPOs is risky but they can be interesting to track
There may be some barriers to you directly participating in an IPO and they tend to be quite risky, but you can learn more about an investment by tracking its IPO performance.
4. š Stay updated on market news and the earnings and IPO calendars
Information is key to investing! You can find information about key dates for public companies using an earnings or IPO calendar and get key news about companies and the market with GenMoneyās Market Mondays.
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