Shana explains the concepts of private shares and an Initial Public Offering (IPO). Initially, companies often rely on private investors and the founders’ capital when they start. Private shares can be common or preferred stock that isn’t traded on public exchanges, making their value harder to determine due to the lack of an efficient and liquid market. When a company reaches a point where it needs additional funds, it may turn to an IPO to raise capital. In an IPO, ownership opportunities are opened to the public, and the money raised goes directly to the company to further its development plans, such as acquisitions or investments in new equipment. Shana advises caution with IPOs as they are highly speculative and can be driven by emotional excitement rather than rational analysis. Many IPOs fail, and it is common for the share price to spike initially and then drop. Therefore, waiting to see the company’s performance and how it deploys raised capital is recommended before investing.
What is a private share and what is an IPO? Okay. So a lot of times, you know, when companies get started, they have limited resources. You know, they have private investors that invest. They have, you know, a lot of companies or founders of companies invest their own money. And then they sort of get to the end of that. And they really want to turn that over to the public or raise more money. So they’ll look for ways to do that. An IPO is when the ownership opportunity of a company is extended to the public for the first time. So in an IPO, money goes directly to the company for deployment as they see fit. So they probably have some plans to make some acquisitions or to invest in new equipment or whatever it might take to get their business to the next level. And so buying shares on an exchange, whenever you buy shares on an exchange, typically you’re not giving money to the company. You’re just buying someone else’s ownership in that company. So private offerings could be in the form of common stock or preferred stock. And those shares don’t trade on an exchange. So the value for those kinds of shares is a little bit harder to determine because you don’t have an efficient market determining the price like you do on the secondary market. You have hundreds of thousands of investors that are bidding for and selling their shares, so you really get an efficient market. You don’t have that kind of liquidity with private shares. And Shanna, for these IPOs, when I think about this, my guess would be that some of them possibly fail, right? They’re trying to get started up, and they can’t make it work. So how much emphasis should we put on when we see these and we think that could be a potential good buy? How much emphasis should we put on waiting to see if the company has a trajectory of long-term health? I think a lot. Yeah. So I’m super leery of IPOs because there isn’t a lot of history that we can look at to make a good assessment of the risk and potential returns. IPOs are very commonly, very emotionally charged events that are driven by greed. So there’s a lot of excitement because you hear all these stories of how people made tons and tons and tons of money when they bought Microsoft when it was an IPO or Apple and how much those shares are worth now. But what you don’t hear a lot is all of the IPOs that fail. So it’s very, very common for a share price on an IPO to spike on the first day and then drop off dramatically. So you really need to wait around and see how that company is going to perform and how they’re gonna deploy the capital that they raised in the share.
