Imagine having the opportunity to get in on the ground floor of Amazon or Google. Some people were able to do so, and those who held their shares for the long run profited handsomely from the risk they took.
When most people think about investing in a new company, an initial public offering, or IPO, is what they usually think of. However, there is frequently an opportunity to invest in pre-IPO stocks. You might be wondering why pre-IPO investments might be a good idea. After all, there is no proven track record for many of these companies.
Why Should You Invest in a Pre-IPO
Although they are not the only companies that will offer a pre-IPO issue of shares, tech companies that are able to find a market niche can be some of the best long-term investments. A pre-IPO issue has the possibility of providing massive returns over the long haul.
Effectively, new companies will usually seek to sell shares to raise funds that can allow them to continue operating and expand before they become profitable.
Additionally, these shares are not traded on the public exchange, which means they are unregulated. This means that they can be easier and cheaper to trade. Checking with banks or platforms like Urban Capital Network can be a great way to find companies that are looking to offer shares for funding.
Risks and Benefits of a Pre-IPO
Like any other investment, there are potential risks that come with investing in a pre-IPO. However, these investments can provide some of the biggest upside possibilities that are available in the investing world.
The main risk is losing money.
It’s possible to lose your entire investment. This is the worst thing that can happen when you invest in a pre-IPO issue of a new company’s stock. The downside is limited to your total investment.
When looking at the possible benefits of a pre-IPO investment, the upside is nearly limitless. Obviously, it will not grow to infinity because that is a mathematical impossibility, but it can grow many times over.
A $10,000 investment that buys 100 shares at $100 a share could theoretically grow into millions of dollars over time. If the company becomes profitable, it could start paying dividends. Reinvesting these dividends will buy more shares.
Additionally, many companies will institute a stock split when shares reach higher prices, and this can also increase the number of shares you hold. Dividends and splits are not likely to occur before an official IPO, but they can multiply the number of shares you can hold.
Who Is Most Likely to Benefit from a Pre-IPO?
When thinking about a pre-IPO issue, an important question to ask is who is most likely to benefit.
Anyone who invests can benefit.
However, it’s important to remember that these investments can be more risky than established companies that have a track record of growing revenue, income and dividends. Companies that are not yet on the public market are more likely to seek out funding to continue or expand operations.
The company might fail.
Therefore, those who have a bit of money stashed away are more likely to feel comfortable taking on this risk. If you can’t afford to lose the money, you might want to think twice before investing and stick with broader investments like index funds.
On the other hand, if you have a high risk tolerance, it might be worth investing in a pre-IPO even if you don’t have a healthy nest egg that you can afford to lose.
A person’s station in life can also impact whether they’re comfortable investing in a pre-IPO. If you’re single with no kids at home, you might have more disposable income available to invest. A couple with children to feed and a mortgage to pay will likely find it more difficult to come up with the money to invest.
It’s also important to keep in mind that profiting handsomely will likely require holding a pre-IPO stock for a long time before reaping the rewards. Like other stock investments, those who avoid selling are more likely to succeed and see their investment really pay off.
What Do You Need to Know Before Investing in a Pre-IPO?
Before you invest in a pre-IPO, you’ll want to look into the founders of the company. Are they reputable people with good character? If so, they will be more likely to succeed over the long haul because they will do the right thing when dealing with their customers.
You’ll also want to look at the firm’s business plan and financials. What value does the company promise to provide? You’ll want to assess whether they are attempting to meet a need that’s currently unmet in the marketplace.
Additionally, what do revenue and expense projections look like? The answer to this question can provide a good idea of whether the company will be profitable in the long run.
Why Pre-IPO Investments Make Sense
If you have some disposable income available to invest, purchasing shares in a company that’s not yet available on the public markets can be a great investment.
These companies come with risks that are similar to those that come with other stock purchases. However, they can come with an upside that is nearly limitless for those who have the fortitude to stick around for the long term. If the company is successful and makes a public offering on one of the major exchanges, few investments can pay off more.