It’s IPO season again on both sides of the pond with a Twitter IPO in the US and the Royal Mail IPO in the UK but what is an IPO and are they always a good investment?

In this article, I will be revealing what an IPO is and discussing the Twitter IPO and Royal Mail IPO in particular as well as contrasting them both with the big Facebook IPO of 2012.

If you are considering investing in an IPO any time soon, whether it be the Twitter IPO, the Royal Mail IPO or similar then this article should provide you with a few pointers on what to consider before investing your cash.

And if you’re new to stock market investing, I’ll be giving you some free help with how to get yourself prepared in advance.

So first things first then…

What Is An IPO

The term IPO is an abbreviation for Initial Public Offering.

This is a new issue or initial flotation of company shares on a public stock market such as the New York Stock Exchange, London Stock Exchange or similar.

Companies issue shares on a stock market to raise money – a bit like going to the bank to ask for a loan but, in this case, going to a stock market and asking stock market investors to put up the cash instead in return for receiving shares in the company.

Once a company is floated on a stock market, it can issue new shares at any time, to raise more funds for its use.

Typically, companies do this when they need the money for something big and important such as to purchase another company.

Hence, being listed on a stock market provides a company with the ability to access new money relatively quickly and easily.

The timing of initial listing, i.e. IPO of a company, is therefore quite interesting because it suggests that the company sees a need for a major injection of cash.

Alternatively though, the IPO differs from future company share issues because it is unique in that it opens up the ownership of the company to thousands or millions of small investors (like you and me) in one fell swoop.

In other words, it provides the owner or initial investors with a one-off opportunity to sell their ownership to the public and thus make a fortune from their company investment to date.

If it was your company that was being floated – how would you decide the best time to sell?

Would you sell when the company was doing really well and the stock market was riding high or would you sell when your company was doing badly and you needed the cash?

You’d sell when you think you will get the highest price presumably i.e. when your company is doing well and the market is riding high.

In the case of Facebook, I predicted in advance of the Facebook IPO that it was a bad investment and I was proved right (see my article here).

Now let’s look at Twitter…

Twitter IPO

Twitter has recently informed the Securities and Exchange Commission (SEC) that it intends to float in the near future but it has not yet published any financial data.

So we can’t analyse the financials like I did with Facebook just yet – we’ll have to wait a while longer for that.

However, we can ask why Twitter is floating.

The good news is that Twitter seems to be coming to market much earlier in its evolution than Facebook did.

In other words, Facebook came to the market when its user population (and thus growth) was peaking whereas Twitter is still growing at this time and looks like it has more to come.

However, Twitter is not yet as advanced as Facebook was at creating revenue from advertising, etc.

Facebook wasn’t great at this either, but at least it was generating $1 billion in annual revenues at the time of its flotation.

Indeed this may be why Twitter has not yet published any financial data – to give it more time to build its revenues up before it comes to market?

The bad news is, like Facebook, I suspect that Twitter is coming to market, not because it needs a big injection of cash to grow the company, but because its owners think they will get the best price at this time.

The NASDAQ is riding high after fighting back from the financial disaster of 2007 and investors are upbeat at present.

This is also the case with the UK FTSE and probably explains why the UK Government is selling off its ownership of Royal Mail.

Royal Mail IPO

Unlike Facebook and Twitter, the Royal Mail is an established company with a long financial track record.

Royal Mail is a logistics company, not a technology company and it operates predominantly within the UK, delivering mail and parcels to UK homes and businesses.

It also has a European business delivering mail and parcels to customers in a large number of European countries.

As its name suggests, Royal Mail has been owned and operated by the Government public sector previously and in recent years has been working towards private ownership.

The Royal Mail IPO has thus been coming for a number of years and so the timing now has a lot to do with getting a good selling price for the UK Government at a time when it needs the cash.

At first glance, the Royal Mail IPO would therefore seem to be a better investment than Twitter…

but not necessarily.

Are IPO’s A Good Investment?

The short answer to this one is “it depends!”

In the case of Facebook, the answer was a resounding no.

Read part 1 and part 2 of my lessons learned articles for more information on why I’m saying this.

As you’ll see from those two articles, if you wanted to hold Facebook shares then you were much better off waiting for the share price to fall back after the IPO and buying them in the open market like any other share purchase.

In the case of some UK flotations like British Gas though, the answer was probably “yes.”

As for Twitter and Royal Mail, we’ll have to wait and see.

It’s all about the price you have to pay at the time of the IPO compared with the value of the shares at that time.

When the financial prospectus is available, I’ll be taking a look, valuing the shares and writing about in on this blog.

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Get Ready For The IPO

If you have some spare cash and you think you might like to invest in an IPO but you feel intimidated by the stock market; don’t really understand shares and want to know how to buy and sell them to make money then you can get started by downloading my FREE e-book below.

And if you’d like to know about the “3 BIG Mistakes That Beginners Make When Investing In Shares And How To Avoid Them” then click here to access my free training.

In any case, please leave me a comment below and let me know your thoughts on IPOs, the Twitter IPO or Royal Mail IPO in particular.