Table of contents
Introduction
Today there is a wide range of options available for investing your money such as mutual funds, stocks, real estate, and more. While you may already know about these investment choices, do you pre IPO investing?
Pre IPO investment involves purchasing shares in a private company before it goes public with an Initial Public Offering (IPO). It’s like being part of a company’s secret club. You invest before they hit the stock market stage.
Sounds interesting? Let’s dive into what is pre IPO investment and what you need to know before making a move.
What is pre IPO investment?
Pre IPO investing is about buying shares in a company before it gets listed on the stock market. In simple words, when you, as an investor, put your money into a company before it goes public, it’s called pre IPO investing.
For companies, this serves as a means to raise funds. Investing in pre-IPO placements provides investors with an early entry point for acquiring shares in promising companies, offering opportunities for both early and late stage pre IPO investing
Earlier this type of investing was only available for institutional investors with a deep understanding of the financial market such as private equity companies, banks, and venture capital firms. However, the investment landscape has transformed over the years, and you can also invest in pre IPO companies with ease using new-age investment platforms.
Why should you choose pre-IPO companies?
Companies go public to raise funds via an IPO. However, an IPO means numerous investors trying to grab a piece of the stock. This means, there is a chance that you may not get a company’s stock if the IPO is oversubscribed.
Oversubscription is a phenomenon where investors don’t receive the allotment of shares that they bid for. Here, pre-IPO plays a crucial role by offering prospective investors shares before the IPO at a competitive price.
So, in a nutshell, pre IPO investing can act as skipping the crowd and getting a VIP pass to grab a company’s shares by paying an exclusive price.
When investing in pre-IPO it’s crucial to understand that the pre IPO investment funds (your shares) have a one-year lock-in period, can only be held in demat form and don’t come with a draft prospectus (formal draft).
How to invest in pre IPO companies?
Investing in pre IPO companies offers a unique way to unfold the potential future growth of their businesses.
To invest in pre-IPOs, the first thing you need is a bank account and a Demat account with a broker that offers to invest in unlisted shares.
You should also understand the nitty-gritty stuff related to pre-IPO like premium fees, share prices, company profile, risks involved, etc. The broker can help you with this aspect. Then comes the paperwork. You need to sign a legal agreement with your broker, also known as a term sheet. The last step from your side involves paying the broker either through cheque, or bank transfer. The broker will transfer it to the company.
The shares will be reflected in your Demat account within 24 hours. By the evening of T+0 or the morning of T+1, your shares will show up. The transaction will be a done deal when you see the ISIN number of the shares in your account.
Another way to get pre-IPO investment opportunities is through fund houses. They offer limited-subscription pre-IPO mutual funds that you can invest in.
Advantages of investing in pre-IPO companies
Here are the main advantages you can expect by opting for pre IPO investment opportunities:
Leverage strategic leadership
Opting for pre-IPO investments can help you leverage the leadership of experienced entrepreneurs and grow your funds along with the growth of the company.
Invest in a proven business
Pre-IPO companies have been around for a long period and many of these companies have strong order books and financial performance. Investing in pre-IPO means that when the company’s shares become available to the public, you have the potential to make profits.
Better value for money
Talking about value, pre-IPO stocks can be a budget-friendly option for investors. You get to invest in a company at a fraction of its market value, setting you up for higher returns. Plus, they’re more easily available compared to IPOs.
Lower volatility
Investing in pre-IPO companies can give you the benefit of early investment with reduced volatility as these shares are not listed and thus do not get traded. This is not the case with listed companies as frequent buy/sell impacts its share price.
What do you need to consider before investing in pre-IPO companies?
Before jumping into the pre-IPO world, let’s make sure you’re well-prepared. Here are some things to consider before diving into pre-IPO investing.
Check the financial performance
Take a deep dive into the company’s growth and financial record. Check out how well it has performed in the past and where it stands in the market. Also, check its future outlook and run a peer comparison.
Investment horizon
Pre-IPO investments usually need more time to reflect returns. Understand that you might need to hold your investment for a few years to reap the rewards. That is why you should consider this investment option if it suits your goals and risk appetite.
Company’s legal records
Make sure the company adheres to legal protocols and regulatory requirements. Check their operational framework, legal background and whether they’re complying to government regulations. Unlike listed companies, pre-IPO companies are not required to report and announce their financial statements, which makes this due diligence even more important.
Risk analysis
Like any investment, pre-IPO comes with a risk-reward. Companies can change plans or delay their IPO. This can lead to your capital being stuck without returns. Thus, understand each aspect before investing.
Conclusion
Pre IPO investing includes purchasing shares in a company before its Initial Public Offering (IPO), providing investors with a unique opportunity to engage in early-stage ventures. However, it also demands a strategic structure and due diligence on your side as an investor. To learn more about such investment options, subscribe to StockGro blogs.
FAQs
Pre-IPO investment is when an investor buys shares of a company before it goes public via an Initial Public Offering( IPO). This allows early investment opportunities for investors.
Investing in pre-IPO offers the potential for significant growth potential. If the company performs well after going public, investors can gain substantial returns, and even multiply their initial investment.
You can take advantage of early investment in the company if it has a plan to go public. You also get to invest in companies with experienced leaders and can avoid the volatility of the share price which is a by-product of listed companies. It also offers diversification.
Post the lock-in period, you have the flexibility to sell your pre-IPO shares to anyone. Whether transferring them to a friend’s demat account for immediate money or holding onto them for potential profits, the choice is yours.
All investment options risk one way or another. When you invest in a pre-IPO company, you face risks associated with limited transparency, delay in IPO, as well as risks with its financial performance.
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