Why Buying Into an IPO Is Usually the Worst Trade You Can Make
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Big whoop, SpaceX went public. Why should you care? IPOs tend to generate a lot of hype. SpaceX's opening has stayed in headlines for what feels like ages. You probably recognize the term IPO because of it. So what's the key takeaway? One thing and one thing only, volatility. If you're trying to cherry pick a single company where you invest in the IPO and it helps you get rich quick, you better have a strong stomach and a stronger plan B in case it doesn't work out. Because with high potential reward comes high potential risk.
Okay, everyone, strap in. We're going to Mars. Or at least Elon Musk thought his SpaceX IPO would finally take him there. What's up, everyone? And welcome back to another episode of Net Worth and Chill with me, your host, Vivian Tu, aka your HBFF and your favorite Wall Street girly. That's right. Today's episode is all about IPOs.
I'm Ina Garten. I have a new podcast called Happy Hour with Ina. Each week I'm inviting a really interesting guest to join me for a drink and a fun conversation at my kitchen table in New York City. I'll be getting personal with actors, chefs, comedians, musicians, and writers I admire. So grab a snack, pull up a chair, and join us. You can watch by searching for Happy Hour with Ina on YouTube or listen wherever you get your podcasts. Don't we all need to have more fun?
Okay, so to kick off the episode, what even is an IPO? IPO, initial public offering, kind of sounds like a sacrifice to the gods, which in some ways it is, if the gods were the general public and the sheep being sacrificed was stock in the company. It's actually pretty straightforward when you get to the heart of it. An IPO is kind of a coming of age for a company. It's bar mitzvah. It's quinceañera. It's a way of telling the world that the company is doing well. It's willing to share its profits with more people, and it's ready to accept more investors so that it can keep growing. In basic terms, it's going from a private company to a public one. And quick refresh in case you are very new here. Very simple caveman definition.
Private investments, you not allowed. Public investments, you are allowed. While there is a specific singular day that this move to public trading happens, for example, for SpaceX, it was June 12th. There's a lot of preparation that leads up to a company being ready and approved to do so. And a lot of rules and procedures in the days and the weeks following, both for the company and for the investors. It starts way back, way back when the company first has the idea to go public, which can be years before the actual IPO date. She and first started talking about it in 2022, and they still aren't quite there yet. Now, why would a company want to IPO? There's three primary reasons. One, early investors in the company want to cash in on their investment and going public allows OG investors to sell their shares to the public.
Two, the company wants a more readily accessible form of capital to help them finance investments in technology, infrastructure, hire more people, acquire other companies, aka need money for grow. It's usually a lot easier to raise money from public markets than private ones, so this essentially opens up the bank of you and me for these corporations. And three, marketing. While financial reasons often lead the desire for an IPO, a big splashy marketing moment is also a desirable outcome that can help boost business, assuming all goes well. I mean, come on. Those photos at the New York Stock Exchange? Very cool. So how does the process go? The first real concrete step is securing advisors, the most important of which is an underwriter, usually an investment bank.
That is the link between the company, the SEC, the Securities Exchange Commission, and the public. But companies don't just pick a favorite bank. They, like top-notch PTA parents, host a bake-off. This is a fun little Wall Street term, which means a bunch of banks will compete to win the right to help this company go public. All the banks will provide their POV on valuation, a.k.a.
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