The year is not even over yet, and 2021 is set to go down in stock market history as the one to beat for taking the most companies public. Here’s what you need to know.
As the financial markets wrapped up three quarters and entered the fourth and final one for 2021, it was already apparent that this has been a banner year for initial public offerings — also known as IPOs. With even more expected by year’s end, the number of companies to “go public” is on track to top last year’s record, marking this the biggest IPO boom in decades.
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Riding the IPO wave
Companies from every sector — from tech (UiPath) to healthcare (Clover Health) to e-commerce (Coupang), to gaming (Playtika), and even dating (Bumble) — have been taking advantage of the stock market’s recent record highs, as well as the growing trend of retail investors eager to invest in their favourite companies. The timing was right, and the momentum does not seem likely to slow down as we get closer to 2022.
How does an IPO work?
An initial public offering is the first time a privately owned company makes shares available for purchase by the general public by listing them on public stock exchanges, such as the New York Stock Exchange (NYSE) or the Nasdaq. In other words, a company, which was up to this point privately owned, becomes a publicly traded company — also commonly known as “taking the company public.” Preparation for this move can take quite some time — there are filings with the Securities and Exchange Commission (SEC) or other regulatory entities, meetings with potential investors, and setting an initial price for the offering.
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Why do companies go public?
Before a public listing, a company generally only has a few shareholders. These would include the founders and probably a limited number of investors or venture capitalists. But during an IPO, the number of shareholders greatly increases when the company opens its shares for sale to the public. Basically, anyone can buy shares on a public stock exchange via a licensed broker. While this may mean relinquishing a certain amount of exclusive control over the company, an IPO is still a very attractive proposition for its owners for numerous reasons:
- Raise capital: Offering shares on public markets is a very effective way for companies to raise money. According to Dealogic, 2,044 new listings raised roughly $468 billion year to date globally, already surpassing the record set in 2020, when 1,656 listings raised around $358 billion. Funds that the company requires to expand business operations, finance research and development for new products, or perhaps pay off debts, could be acquired via a successful IPO.
- Greater public exposure: IPOs can be fantastic public relations opportunities. The heavily anticipated event is marked in the stock market calendar and creates a lot of buzz among investors. The public attention and press that accompanies an IPO, thrusts a company into the public spotlight, expanding its reach to new customers.
- Credibility: Not only do companies receive a great deal of attention when they decide to go public, but they also receive credibility. It is well known that during the IPO process, a company must undergo intense scrutiny to make sure they meet strict filing standards. This scrutiny tends to lead to more trust by the public by lending a certain legitimacy to the brand. In the eyes of many, an IPO is an important milestone in a company’s history, and they haven’t “made it big” until they are listed on the stock exchange.
- A means of payment: Public shares are basically a form of currency, since they can be bought and sold on an exchange at market price. This can be useful when compensating employees — the ability to offer stock options allows a company to attract top-tier talent, even if the base salary might be less than that of a competitor. In addition, shares can be used as part of acquisition deals, which are often a way for companies to grow. Acquiring other companies is expensive, but when a company is public, it has the option of issuing shares of stock as payment rather than cash.
The IPO opportunity
It is with good reason that investors often eagerly anticipate a new IPO date. For the long-term investor with patience, buying shares early on and allowing them time to appreciate in value, can turn out to be a very profitable strategy. We can look at two tech titans and their initial public offerings for inspiration.
Google held its highly anticipated IPO in 2004. The company was six years old at the time, and had already become a search engine leader. However, in the shadow of the dot-com bubble, Google ended up setting its IPO price at $85 per share, far lower than the originally planned target of between $108 and $135. But on its very first day of trading, Google stock jumped 18% — and has averaged a 24.8% annual gain ever since.
The ride for Apple has not always been smooth, but has very handsomely rewarded any investors who have held onto the stock since it went public back in 1980. At the time, The Wall Street Journal described the Apple IPO as “one of the most eagerly awaited in recent years” and its 4.6 million shares, priced at $22 each, sold out almost immediately. But, throughout the 90s, the computer company faltered, while its competitors, including software giant Microsoft, thrived. However, most of us know that founder Steve Jobs brought Apple back from the brink, making its innovative brand into a household name — and hitting an all-time high of $156.69 last month, up more than 600% from the original price.
Discuss IPOs with other investors
What’s in store for companies which have gone public in this year’s IPO frenzy? What are the most anticipated upcoming IPOs on investors’ radars now? Join eToro to connect with a whole community of traders, discuss strategies, and share insights on the financial markets.
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