Buy to open is an order type that is like going long a stock. A trader enters an order to purchase either calls or puts depending on their trading thesis.

InvestGen Archives | Page 50 of 62

Aug

2023

Buy to Open vs Buy to Close

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

Buy to Open and Buy to Close are options orders used by traders. A trader buys to open using calls or puts with the goal of closing the position at a profit after the options price increases.

Investors use a “buy to open” order to initiate a new options contract, betting that the option price will go up. On the other hand, traders who want to exit an existing options contract, thinking the option price will go down, use a “buy to close” order.

What Is Buy to Open?

“Buy to open” is an order type used in options trading, similar to going long on a stock. Generally, you think the price is going to go up, which is a bullish position. That said, in options trading, you can buy to open a call or a put, and buying a put is taking a bearish position. Either way, to buy to open is to enter a new options position.

Buying to open is one way to open an options position. The other is selling to open. When buying to open, the trader uses either calls or puts and bets that the option will increase in value – that could be a bullish or bearish wager depending on the option type used. Buying to open sometimes creates a new option contract in the market, so it can increase open interest.

A trader pays a premium when buying to open. The premium paid, also called a debit, is withdrawn from the trader’s account just as the value of a stock would be when buying shares.

Example of Buy to Open

If a trader has a bullish outlook on XYZ stock they might use a buy to open options strategy. To do that, they’d purchase shares or buy call options. The trader must log in to their brokerage account then go to the order screen. When trading options, the trader has the choice of buying to open or selling to open.

Buying to open can use either calls or puts, and it may create a new options contract in the market Buying to open calls is a bullish bet while buying to open puts is a bearish wager.

Let’s assume the trader is bullish and buys 10 call contracts on XYZ stock with an expiration date of January 2025 at a $100 strike price. The order type is “buy to open” and the trader also enters the option’s symbol along with the number of contracts to purchase. Here is what it might look like:

• Underlying stock: XYZ

• Action: Buy to Open

• Contract quantity: 10

• Expiration date: January 2025

• Strike: $100

• Call/Put: Call

• Order type: Market

A trader may use a buy to open options contract as a stand-alone trade or to hedge existing stock or options positions.

Profits can be large with buying to open. Going long calls features unlimited upside potential while buying to open puts has a maximum profit when the underlying stock goes all the way to zero. Buying to open options carries the risk that the options will expire worthless, however.

What Does Buy to Close Mean?

Buying to close options exit an existing short options position and can reduce the number of contracts in the market. Buying to close is an offsetting trade that covers a short options position. A buy to close order occurs after a trader writes an option.

Writing options involves collecting the option premium – otherwise known as the net credit – while a buy to close order debits an account. The trader hopes to profit by keeping as much premium as possible between writing the option and buying to close. The process is similar to shorting a stock and then covering.

Example of Buy to Close

Suppose a trader performed an opening position by writing puts on XYZ stock with a current share price of $100. The trader believed the underlying stock price would remain flat or rise, so they put on a neutral to bullish strategy by selling one options contract.

A trader might also sell options when they believe implied volatility will drop. The puts with a strike of $100, expiring in one month, brought in a credit of $5.

The day before expiration, XYZ stock trades near the unchanged mark relative to where it was a month ago; shares are $101. The put contract’s value has dropped sharply since the strike price is below the stock price and because there is so little time left until the delivery date. The trader profits by buying to close at $1 the day before expiration.

The trader sold to open at $5, then bought to close at $1, making a $4 profit.

Differences Between Buy to Open vs Buy to Close

There are important differences between a buy to open vs. buy to close order. Having a firm grasp of the concepts and order type characteristics is important before you begin trading.

Buy to Open	Buy to Close
Creates a new options contract	Closes an existing options contract
Establishes a long options position	Covers an existing short options position
Has high reward potential	Seeks to take advantage of time decay
Can be used with calls or puts	Can be used with calls or puts

Understanding Buy to Open and Buy to Close

Let’s dive deeper into the techniques and trading strategies for options when executing buy to open vs. buy to closer orders.

Buy to Open

Either calls or puts may be used when constructing a buy to open order. With calls, a trader usually has a bullish outlook on the direction of the underlying stock. Sometimes, however, the trader might be betting on movements in other variables such as volatility or time decay.

Buying to open later-dated calls while selling to open near-term calls, also known as a calendar spread, is a strategy used to benefit from time decay and higher implied volatility. Buying to open can be a stand-alone trade or part of a bigger, more complex strategy.

Buy to Open Put

Buying to open a put options contract is a bearish strategy when done in isolation. A trader commonly uses a protective put strategy when they are long the underlying stock. In that case, buying to open a put is simply designed to protect gains or limit further losses in the underlying stock. This is also known as a hedge.

A speculative trade using puts is when a trader buys to open puts with no other existing position. The trader executes this trade when they believe the stock price will decline. Increases in implied volatility also benefit the holder of puts after a buy to open order is executed.

Buy to Close

A buy to close order completes a short options trade. It can reduce open interest in the options market whereas buying to open can increase open interest. The trader profits when buying back the option at less than the purchase price.

Buying to close occurs after writing an option. When writing (or selling) an option, the trader seeks to take advantage of time decay. That can be a high-risk strategy when done in isolation – without some other hedging position, there could be major losses. Writing calls has unlimited risk while writing puts has risk as the stock can fall all the way to zero (making puts quite valuable).

Shorting Against the Box

Shorting against the box is a strategy in which a trader has both a long and a short position on the same asset. This strategy allows a trader to maintain a position, such as being long a stock.

Tax reasons often drive the desire to layer on a bearish options position with an existing bullish equity position. Selling highly appreciated shares can trigger a large tax bill, so a tax-savings play that also reduces risk is to simply buy to open puts.

Not all brokerage firms allow this type of transaction, however. Also, when done incorrectly or if tax rules change, the IRS could determine that the strategy was effectively a sale of the stock that requires capital gains payments.

Using Buy to Open or Buy to Close

A trader must decide if they want to go long or short options using puts or calls. Buying to open generally seeks to profit from large changes in the underlying stock while selling to open often looks to take advantage of time decay. Traders often place a buy to close order after a sell to open order executes, but they might also wait with the goal of the options expiring worthless.

Another consideration is the risk of a margin call. After writing options contracts, it’s possible that the trader might have to buy to close at a steep loss or even be forced to sell by the broker. The broker could also demand more cash or other assets be deposited to satisfy a margin call.

The Takeaway

Buy to open is a term that describes when an options trader establishes a long position. Buy to close is when a short options position is closed. Understanding the difference between buy to open vs. buy to close is essential to successful options trading. These option orders allow traders to put on positions to fit a number of bullish or bearish viewpoints on a security.

Thinking about investing in options? SoFi’s options trading platform has an intuitive and approachable design that gives investors the ability to trade options either on the mobile app or web platform. Also, they can learn more by accessing the associated library of educational content on options.

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Aug

2023

What Is a Nominated Advisor (NOMAD) in an IPO?

By Paulina Likos | Growing Wealth, invest, Investing, Terminology | Comments Off

A nominated advisor (NOMAD) is a type of corporate advisor, such as a boutique finance firm, investment bank, or accounting firm, which helps international companies get listed on a branch of the London Stock Exchange (LSE).

NOMADs have to be approved by the LSE, and they assist smaller, riskier companies gain access to public capital through an initial public offering or IPO on the Alternative Investment Market, or AIM, which is less stringent compared to larger exchanges.

The NOMAD determines whether the company can be listed on AIM, even if the company will not IPO. If the company ends up pursuing an IPO, the NOMAD advises the company through the AIM IPO process and afterward. Here’s how the process works.

Recommended: What Is the IPO Process?

Nominated Advisor (NOMAD), Explained

NOMADs or Nominated Advisors determine whether a company should be admitted on LSE’s AIM. These are typically small- or mid-cap companies that are seeking aggressive growth and want to be listed on a public exchange. Thousands of companies have gone public, thanks to the more flexible listing requirements of AIM. But these companies are also required to work with a NOMAD that will guide it through this process and continue to be a resource once the company is admitted.

A NOMAD focuses on specific sectors in which they are an expert in, and they provide the company with continuous guidance on all the AIM rules. Assuming the company goes public via an IPO and gets listed on AIM, the NOMAD makes sure the company remains compliant with AIM standards, is up-to-date with AIM’s regulatory changes, and provides the company strategic advice depending on the market cycle.

Some NOMAD responsibilities include: providing financial planning advice, determining whether the company is eligible to be listed on AIM, preparing the company to be listed on the public exchange, and acting as the company regulator during its time on the AIM.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

How Do Nominated Advisors Work?

The Alternative Investment Market (AIM) is a sub-market of the LSE. It is a network that’s designed to allow certain companies that may not be ready for a larger exchange to gain access to the markets and thus reach their full potential.

In order for a company to gain entry into this market, a NOMAD needs to facilitate the process.

The NOMAD does research to see if a company is viable to join this part of the stock market, which is a market for small to mid-sized growth companies. If the company fits the AIM listing requirements, the NOMAD will work with the company to apply to the exchange. If the company is admitted successfully, the NOMAD continues to oversee the company, much like a regulator, to make sure the company is adhering to all the AIM rules.

Recommended: How to Buy IPO Stock

Qualifications for NOMADs

The NOMAD has to be approved by the London Stock Exchange, and there are certain criteria the advisor must meet in order to hold the title of a NOMAD.

First, a NOMAD is not an individual person, rather it is a firm or company that a company uses to get on the LSE. And according to the AIM rules, the NOMAD has to have practiced in corporate finance for at least two years.

The NOMAD needs to also have experience in facilitating at least three qualified transactions.

Lastly, the NOMAD must employ at least four qualified executives on staff of the firm. To become a NOMAD, the firm needs to complete the Nominated Advisor application form.

Once the NOMAD is appointed for the company, typically a smaller company by market cap, the Nominated Advisor is then responsible for advising and guiding the company on how it can be successfully admitted into AIM. The Nominated Advisor must maintain its eligibility status even after it is approved by the LSE.

The Exchange can conduct interviews with the NOMAD to ensure it maintains understanding of AIM rules for companies seeking admission and maintaining their position in the exchange. This is important to mitigate the potential for risk for investors. IPOs are considered extremely volatile events, and can expose all investors — but particularly inexperienced individual investors — to heavy losses.

💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

The NOMAD Process

The NOMAD is needed once a company decides it wants to be listed on the AIM. Next, the NOMAD is appointed to assist the company through the application, admissions processes and ongoing guidance while listed on the exchange. After the company is finally listed on the AIM, the NOMAD offers consistent oversight of the company to ensure its listing.

Once admitted to the exchange, if the company the NOMAD oversees does not continue to meet AIM requirements, the NOMAD may choose to resign from their position or report the company, otherwise, the NOMAD could be subject to a fine for not upholding AIM expectations. In such a scenario, the company’s shares would be suspended and eventually de-listed if a NOMAD replacement is not found within a 30-day period.

What Is the Importance of a NOMAD During the IPO Process?

The Alternative Investment Market was launched in 1995, and its success can be partly attributed to the role that NOMADs play. When a company applies to be admitted into AIM, the NOMAD facilitates the process and is integral to the company getting listed on the exchange. The company that wants to be listed in AIM must appoint a NOMAD, a trusted and experienced representative that ideally may lead the company to go public.

This critical process requires the NOMAD to make sure the company is following the AIM’s rules and regulations, which is why the LSE had strict criteria for becoming a NOMAD. The Exchange wants to ensure the company seeking admission to AIM meets the criteria and has the potential to be a long-term success, and to keep the integrity of the market and protect shareholders who may invest in companies listed on the exchange.

The Takeaway

For some smaller, perhaps riskier, companies hoping to gain access to market capital, a NOMAD or nominated advisor, is required to become listed on the Alternative Investment Market (AIM), a submarket of the London Stock Exchange (LSE).

This route may offer an easier path to an initial public offering. The AIM is considered less rigorous in its requirements, compared with some larger exchanges, and they will consider listing small companies seeking aggressive growth as long as those entities are paired with a NOMAD.

The NOMAD is typically a corporate finance advisor that thoroughly reviews the AIM applicant in terms of its business model, track record, executive team, financials, and so forth. Assuming the company satisfies all requirements, the NOMAD agrees to assist the company in its application to the AIM, and to continue to provide oversight afterward.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is a NOMAD company?

A NOMAD company is a financial entity that has been approved by the London Stock Exchange (LSE) to help eligible companies who are interested in being admitted into Alternative Investment Market (AIM), which is part of the LSE.

What do NOMADs do during an IPO?

As corporate nominated advisors, NOMADs provide advice to a company that wants to go public on AIM. The NOMAD has market sector expertise and does their due diligence to make sure a company meets the eligibility requirements to be listed on the exchange.

What is a NOMAD investment?

NOMADs is integral in the pre-IPO process because they provide guidance for being admitted into the exchange along with ongoing oversight once the company has successfully been accepted into the public exchange.

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Aug

2023

Do IPOs Offer Dividends?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Some companies may have the financial means to make regular dividend payments before being listed on a public exchange, i.e. prior to their initial public offering, or IPO. A company may choose to offer this type of pre-IPO dividend in order to garner interest in the IPO if it anticipates a high valuation.

Dividends represent a percentage of a company’s profits that it pays out to shareholders. Dividends most commonly come from established companies, but it’s possible to collect an IPO dividend from up-and-coming companies as well.

Do IPOs Offer Dividends?

Most companies that are going public are doing so to raise capital and don’t necessarily have money to spare that they can pay out as special dividends or stock dividends.

However, some companies involved in the IPO process can pay dividends on a regular basis before and/or after going public, or they may pay a special one-time dividend. In either case, the dividends could serve as a useful incentive to attract and retain investors.

In general dividend-paying stocks and IPOs pay different roles in an investors’ portfolio. The former represents a steady source of income, while the latter holds the potential for capital appreciation through strategies such as the Dogs of the Dow, a strategy in which investors purchase the Dow Jones Industrial Average stocks with the highest dividend yield.

A simple way to know whether a pre-IPO company plans to offer a dividend is to review their registration documents. Companies must amend their S-1 registration form with the SEC if they plan to offer any type of dividend payment to investors. You can find S-1 forms through the SEC’s EDGAR database online.

💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

REIT IPOs and Dividends

Typically, companies do not offer dividends as part of the IPO process. If you do find an IPO company that’s offering a dividend payment, it’s more likely to be a real estate investment trust (REIT) versus a more traditional company structure.

REITs are companies that own income-producing real estate investments and must pay out 90% of their taxable income to shareholders as dividends. Just like other companies, REITs can choose to go public in order to raise capital from investors.

REIT IPOs work a little differently than other IPOs in that there are additional filing requirements they have to meet under SEC rules, but otherwise the overall process is largely the same.

IPOs Explained

IPO stands for Initial Public Offering, and the event represents the first time a company makes its shares available for trade on a public exchange. This is often referred to as “going public”.

Companies launch IPOs, a process regulated to raise capital from investors. The Securities and Exchange Commission regulates the IPO process to ensure that the company has performed its due diligence, completed all of the appropriate paperwork, and established an accurate valuation of the IPO.

Investing in IPOs can offer an opportunity to diversify a portfolio while potentially getting in on the ground floor of a company poised for significant growth. It can, however, be risky as there are no guarantees whether an IPO stock will be a success — and even a successful IPO doesn’t necessarily predict how well a company will do over time.

For this reason, it can be difficult for individual investors to buy IPO stock when it’s first issued. In most cases, individuals can trade IPO shares on the secondary market through their brokerage.

IPO stocks are considered high-risk investments, and while some companies may present an opportunity for growth, there are no guarantees. Like investing in any other type of stock, it’s essential for investors to do their due diligence.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Dividends Explained

A dividend is a share of a company’s profits that’s paid out to shareholders, usually in cash. The company determines how frequently to make these payments to investors. For example companies may pay dividends on a monthly, quarterly, biannual or annual basis, or it can pay them on a one-time basis.

The amount an investor receives in dividends correlates to the amount of stock they own. Preferred stock shareholders receive first priority for dividend payouts, ahead of common stock shareholders. However, preferred stock shareholders do not have voting rights while common stock shareholders do.

Companies that offer dividends can decide whether to increase or decrease dividend payouts over time, depending on profitability. Companies that consistently increase dividend payouts over a period of 25 consecutive years or more are called Dividend Aristocrats. Companies that do so over a period of 50 consecutive years or more are called Dividend Kings.

Types of Dividends

Dividends can take different forms, depending on when and why a company pays them out to investors. When discussing IPOs and dividends, you’re typically talking about special dividends and stock dividends. Companies may use both to encourage investors to buy that their IPO is an investment opportunity, though they aren’t exactly the same in terms of what the investor is getting.

Special Dividends

Special dividends, also referred to as one-time dividends or extra dividends, are dividend payments made to investors outside the scope of regular dividend payments. A company that plans to go public may make a pre-IPO special dividend payment to its existing shareholders. The total value of the dividends paid may be equal to or less than the amount the company expects to be raised through the Initial Public Offering.

Dividends

Dividends are regular payments made in stock or via cash to shareholders out of a company’s profits. Cash dividends can increase the value of an investor’s holdings over time if the investor reinvests them in the stock. Again, the amount an investor receives in dividends depends on the company.

Dividends may go up when profits are up and drop when profits fall. But a high dividend payout alone is not a reason to consider investing in a company. It’s important to look at the company’s financials to determine whether that higher payout is sustainable over time.

Why Do Companies Give Dividends?

Companies offer dividends as a reward or incentive to attract new investors and retain existing ones. A company that offers a dividend regularly can attract income-focused investors. As long as the dividend payout sticks around, then the investors are likely to stick around as well. Of course, this assumes that a company is profitable and has the means to pay out dividends in the first place.

Dividends are less common among newer companies because they’re typically reinvesting any profits they realize into further growth. That doesn’t mean they won’t offer a dividend to investors later but for the near term, they may need every bit of profit to continue expanding.

The Takeaway

The purpose of most IPOs is to raise capital and generate buzz; paying shareholder dividends is more common with an initial public offering for a REIT than a traditional company IPO. In either case, the dividends could serve as an incentive to attract new investors.

The easiest way to know whether a pre-IPO company plans to offer a dividend is to review their registration documents by reading the S-1 registration form that’s been submitted to the SEC.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is an IPO dividend?

An IPO dividend is a dividend payout associated with a company’s Initial Public Offering. IPO companies can make special dividend payouts on a one-time basis or offer regular stock dividend payments to investors.

How do shareholders make money in an IPO?

Shareholders can make money in an IPO if they’re able to sell shares at a higher price than their initial offering price. Shareholders can also collect IPO dividend payments to supplement their profits.

Are dividends taxed?

Yes. The IRS considers dividends a form of taxable income. The tax rate that applies can depend on whether you have qualified or nonqualified dividends. The IRS taxes nonqualified dividends at ordinary income tax rates while qualified dividends follow the long-term capital gains tax rate structure.

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Aug

2023

International IPOs for International Investors

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Private companies often choose to go public in the country that offers the brightest prospects for a successful IPO. Sometimes, that means getting listed on a stock exchange in the company’s home country — but sometimes it makes more sense to list in a foreign market.

So, while many U.S. investors focus primarily on domestic companies, it’s also possible to invest in an international IPO.

Likewise, foreign companies can choose to launch their IPO on U.S. stock exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq. And in some cases, a company could choose to do both through a global IPO.

Investing in IPOs, international or domestic, may appeal to certain investors who want more geographic diversity within their portfolio, and understand the risks of doing so. Knowing how these IPOs work and where to find them is the first step.

What Are International IPOs?

An international IPO is an initial public offering from a private company that takes place outside of that company’s home country. For example, a company based in South Korea decides to go public but instead of listing on the Korea Exchange (KRX), it wants to list on an American exchange.

If the company successfully meets the regulatory requirements established by the Securities and Exchange Commission (SEC), it could move forward with an international IPO. International investors could then purchase shares of the company once it begins trading on the NYSE or Nasdaq.

In most cases, an investor must apply or qualify to buy IPO shares through their brokerage, as these stocks can be restricted in certain ways, limited in quantity, and come with a much higher risk level than other types of stocks.

There are a number of reasons and companies may choose an international IPO. Those include:

• More lenient regulatory requirements for securities on a foreign exchange than those of the home country.

• Better prospects for raising capital through an IPO on a foreign exchange.

• More credibility versus listing on its home country’s exchange.

The most important thing to keep in mind with foreign companies that list on U.S. stock exchanges is that they must complete the IPO process just like a domestic company would.

💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

Understanding IPOs

When discussing IPOs, “international” refers to public launches involving companies that are foreign to the market they plan to list in. But what is an IPO in general?

In simple terms, an IPO represents the first time that a private company allows investors to purchase shares on a public stock exchange.

Why do companies choose to go public? The answer can depend on the company and its overall business plan. In most cases, the answer is to raise capital so the company can continue to grow and expand. Companies don’t enter into the IPO process lightly, however, as it can be time-consuming and costly.

In the United States, the SEC regulates the IPO process. An IPO can take upwards of a year to complete, as the company moves through the various phases, including:

• Due diligence

• SEC review

• Road show

• Valuation

• Launch

International IPO Funds

With domestic companies, it’s possible to purchase IPO stock on the day the company goes public, using an online brokerage account. In the case of companies that offer pre-IPO placements, it may also be possible to purchase shares before they’re made available to the market at large. Effectively, you’re investing in a private placement.

When investing in international IPOs, you may choose to invest through IPO mutual funds or international exchange-traded funds (ETFs) instead. You might go this route if you want more diversification, or if you don’t have access to IPO shares.

When comparing international IPO ETFs or international mutual funds, it’s important to consider a few things, including:

• Underlying holdings (i.e. which sectors does the fund include, what countries does it offer exposure to)

• Expense ratios

• Management style (i.e. active versus passive)

With either type of fund, you’d also want to consider the track record and performance, particularly in the case of actively managed funds with a higher expense ratio. This can help you determine if a higher returns justify a higher expense ratio.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

International IPO ETFs

What is an exchange-traded fund (ETF)? An ETF is a type of pooled investment that combines features of both mutual funds and stocks. Essentially, it’s a mutual fund that trades on an exchange like a stock.

This feature makes ETFs different from mutual funds. However, like mutual funds, ETFs have an expense ratio that reflects the annual cost of owning the fund over the course of a year. ETFs can follow an active or passive management strategy, with some funds using an index-based approach.

For some investors, international ETFs that concentrate holdings on companies that go public in foreign markets could make sense since they provide diversified exposure to newly listed non-U.S. companies in a single investment vehicle.

International IPO Mutual Funds

Mutual funds are also pooled investments, meaning multiple investors contribute funds used to buy underlying securities. Each investor in the fund assumes a share of the fund’s earnings (or losses), based on the number of shares they own.

The key difference between mutual funds and exchange-traded funds is how they’re bought and sold. Rather than trading on an exchange like stocks, traders settle mutual fund transactions once a day.

Mutual funds that invest solely in international IPOs may be harder to come than international IPO ETFs. But there are mutual funds that focus on international holdings.

How to Find International IPOs to Invest In

You may be able to purchase international IPOs or international IPO funds through your brokerage account.

To find potential investments, you might use an online resource like the Nasdaq IPO calendar, which lists all upcoming IPO dates. This can help you identify potential investment opportunities for upcoming international IPOs or global IPOs. Investing websites that report on the latest market trends and news offer another way to gain information about foreign companies that are pursuing international IPOs.

Key Things to Consider When Investing in International IPOs

If you’re looking to international IPO funds for investment, consider the following:

• What the fund holds (both the companies and the geographies)

• The expense ratio, or costs associated with the fund

• The fund manager’s strategy (or the index it follows)

• If you’re investing in multiple international IPO funds, consider whether there’s any overlap in the holdings that might reduce your diversification

Evaluating international IPOs is similar to evaluating domestic IPOs. The company’s prospectus provides important information about the offering. Though keep in mind that a red herring prospectus may not disclose full details about the company’s financials or organizational structure.

It’s also important to consider risk factors unique to a foreign company that could affect its IPO outcome. A company located in a country that’s experiencing geopolitical turmoil or economic impact related to climate change, for instance, may have a higher risk profile than a company that isn’t facing those types of threats. So getting familiar with a company’s economics, politics and geography may be helpful before investing in an international IPO.

The Takeaway

IPOs allow investors to get in on the ground floor of an up-and-coming company. Whether you choose to invest in domestic IPOs or international IPOs, it’s important to understand, however, that they can also represent a riskier investment than an established public company.

International IPOs come with their own special set of concerns. While qualified U.S. investors may have access to IPO shares, it’s important to read the prospectus of international companies carefully, understand the product and the market you’re investing in, and vet the terms of any IPO international stock before you choose to buy it.

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Aug

2023

Guide to the Dual-Track Process for IPOs

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

A dual-track initial public offering (IPO) allows companies to explore both going public and a private sale simultaneously.

For the company’s early and initial investors — those who acquired equity during seed funding rounds, for instance — both an IPO and a private sale could present an opportunity to cash out on their investment. Or, to find an exit.

Often the dual-track process may allow investors to get a higher return on their capital, since they can choose to move forward with the method that provides a higher valuation.

Dual-Track IPO Process Explained

For many early-stage investors, be they private equity or venture capital firms, or individuals, the time to execute an exit strategy is often when a company goes public, as an IPO opens up an opportunity for early investors to make an exit.

In a dual-track process, a company works toward both an initial public offering and a private sale through an auction — or an M&A (mergers and acquisitions) process — at the same time. The dual-track process gives investors looking for an exit the potential to fetch a higher valuation for their investment, particularly when market conditions make an IPO less than ideal.

How the Dual-Track Works for IPOs

Investors have an endpoint in mind: An exit and liquidation of their stake in an investment (the company). It only makes sense, then, that they’d want to get the highest possible profit back from their investment, while being aware of the substantial risks involved in the IPO process. That’s the aim of the dual-path IPO.

As such, the process varies — and a lot depends on the goals of the investors. But by exploring both an IPO and a potential M&A deal, companies have options. The process isn’t all that structured, as each company’s circumstances will differ.

But in broad strokes, the process utilizes two teams: One staffed with underwriters to prepare for an IPO, and another with lawyers and advisors who are feeling out potential M&A partners.

While the IPO process proceeds slowly, the M&A team is meeting with investors. When the regulatory approval has been granted for an IPO — a company can look at its options and decide if it wants to go public, or otherwise find a buyer through an M&A deal.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

What Is the Purpose of the Dual-Track IPO Process?

The goal of the dual-track process is simple: To increase the value of a company before its investors execute their exit.

But the process also provides companies a certain level of flexibility to either go public, or pursue an M&A deal or a private placement. Having options can help investors ultimately reap more gains if one avenue provides a higher valuation.

Recommended: Why Do Companies Go Public?

Benefits of the Dual-Track Process

Though the dual-track process is more resource-intensive than a traditional IPO, there are some clear benefits to engaging in it, including:

• Flexibility: Utilizing the dual-track process gives companies the chance to either go public or execute a private deal, rather than being bound to one or the other. It gives companies additional options.

• Maximizes odds of a higher valuation: Additional options means that there can be multiple valuations on the table. For instance, a private deal may value a company more than if it were to IPO. For investors, getting an idea of a company’s ultimate value from more than one source can be illuminating, and they may learn of exit opportunities that they did not previously recognize.

• Mitigates risks of the market: The market isn’t always going to cooperate when a company plans to IPO. There are a lot of factors that can hurt an IPO, and by having another option (an M&A deal), the dual-track process can help reduce the risks of going public at the wrong time.

Using Dual-Track for an IPO Exit

For investors who want to exit their investment, the dual track IPO provides several options. If the firm IPOs, they can sell their investments (after the lockup period) to the public. If the company goes the M&A route, early investors can sell some or all of their stake in the company to the acquirers.

💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

Is Dual-Track Suitable for Every Company?

No. Given the resources required, not every company should pursue a dual-track IPO. Whether it makes sense for a specific company will depend on the company’s and the investors’ goals.

Some companies might want to go for the private sale route, for example, because they want to avoid the disclosure process in an IPO. On the other hand, some organizations will want to focus on an IPO because there aren’t any appealing potential buyers on the market.

M&A Exit Explained

An M&A exit is a private deal between the company and another company (or companies). Often the two companies have some sort of aligned interest or operate in the same market, and one acquiring the other serves to increase market share or create a more diversified, multi-dimensional company.

And naturally, there are some pros and cons to an M&A, just as there are for an IPO.

Pros of M&A Exit

The biggest benefit of an M&A exit is the prospect of a higher valuation. That can come for a few reasons: A buyer may have an immediate need for the service a company provides, and needs to onboard as soon as possible, for instance, or multiple potential buyers can bid up a company’s value.

Also, the prospect of less disclosure (as opposed to the IPO process) can also be very attractive for some companies — like those in tech.

Cons of M&A Exit

Conversely, there are some potential drawbacks to an M&A exit, particularly for entrepreneurs with an emotional attachment to their business. A buyer may “clean house,” so to speak, and replace employees or company leadership, for one. It may also drastically restructure the business itself.

The Takeaway

A dual-track IPO is a way for companies to explore multiple liquidity events to choose the one that makes the most sense for their organization and their investors. If those companies do choose to go public, retail investors will have an opportunity to purchase shares in them for the first time.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is an M&A exit?

An M&A (mergers & acquisitions) exit is when one company purchases, or merges with, another company. For investors, a company being acquired by another offers the chance to liquidate their position, as they’re selling their equity to the purchaser.

Is an IPO part of M&A?

No. A company typically either executes an IPO or goes through an M&A deal — investors are looking to exit through one or the other. However, companies that plan on going public or that have gone public can still engage in M&A deals. And an M&A deal may still result in a company staying private, too.

What are M&A deals?

M&A deals can take several forms: Mergers, acquisitions, consolidations, outright purchases, etc. The essence of an M&A deal is that one company, or its assets, is absorbed by another. Two become one.

Photo credit: iStock/kate_sept2004

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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