An IPO is one of the most commonly seen acronyms within the world of investing. IPO is another term for Initial Public Offering. This is essentially the means by which a company will offer its shares to the public for the first time after listing on a specific market (such as the Dow Jones or the ASX). These shares can be distributed via an institution to clients or certain individuals may very well be able to get in on the proverbial "ground floor". What are the most fundamental points to keep in mind before getting involved with an IPO?

Advantages of an IPO

The most attractive quality of an initial public offering is that pre-market shares will often substantially rise in value when they are first publicly listed. Thus, a massive profit can be made within a short period of time. The flotation of Facebook on the open market is a great example of this phenomenon. Depending upon the company, the investor could instead choose to hold these shares for months or even years (envision Apple in this sense). Getting involved before a market listing will also limit the amount of inter-day volatility, as little trading has occurring.

Potential Disadvantages

First, not every IPO will skyrocket when it first comes to market. Could its initial performance prove disappointing, the trader could lose a substantial amount of his or her investment. It may also take a great deal of time to recuperate such losses. Another point to mention is that the sale of an IPO is normally restricted for 30 days after its flotation. This protects investors from "dumping" their shares and causing a massive decline in the value of the asset. Such a feature can prove to be frustrating if the price continues to rise during this initial grace period.

A Word of Caution

In and of themselves, IPOs can be lucrative portions within a portfolio. However, these assets have received their share of bad press. This has mainly been the result of the unscrupulous sales tactics associated with certain off-shore companies. Arguably, the most notorious of circumstances can be seen in the selling of so-called "Pink Sheet" shares out of the United States. As a greater level of transparency occurs ONLY after the listing process, many investors have been duped into purchasing shares that turn out to be worthless paper associated with a shell company and nothing more. This is one of the main reasons why only larger firms which are recognised should be dealt with.

Online Stockbroking and IPOs

Once a listing goes public, companies such as CMC Markets will be employed to monitor, purchase and sell these assets. This is an excellent way to benefit from superior levels of transparency while taking advantage of some of the latest trading software in existence. So, what may have initially been a small commitment could quickly evolve into a major holding.

Initial Public Offerings represent an excellent investment vehicle for traders of all sizes. Appreciating the basic fundamentals of these assets will help to guarantee future financial liquidity.