How to Determine the Value for Shares of an IPO

After cutting through the initial rush of excitement that often accompanies a public offering security’s debut, a common result is that zealous investors may have inordinately influenced its market price. But the value of shares of an IPO is more closely aligned with the stock’s actual book value than with its investor sentiment-driven markup. If you go back to basics by analyzing the IPO's prospectus and objectively reviewing its balance sheet, you’ll be able to calculate its share value a little more realistically by looking at the tangible value of its assets.

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Ride Out the Honeymoon Phase

Don’t get caught up in the excitement surrounding an IPO or you might forever be waiting to break even after the company's stock price flounders when the IPO euphoria wears off. Generally, the price of shares is set by the usual forces of supply and demand. IPO shares are no exception and will sell for whatever price an investor is willing to pay for them. If you suspect that the share price is unnaturally high, it's a good idea to wait until the IPO euphoria is over to see if the stock price falls in response to the market’s new perception of the stock’s value.

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WHAT ARE SHARES AND HOW DO THEY WORK?

When you buy a share of a company, you become s shareholder, i.e. an owner, of that company in a very small percentage.

​ when the company allocates dividends, you will receive a part of this. Staying with the previous Tesla example, let’s assume that in 2020 Tesla will pay $100 million in dividends, then you will receive $61 (0.000061%*100 million).
​ if you are a shareholder, you have the right to participate at the company's annual meeting. At the annual meeting, you will have the right to vote on the topics that will fundamentally influence the future of the company. These topics can vary from the election of the board of directors to the amount of the dividends allocated.

Speaking about financial literacy: when you read about buying shares online, you may find that both the expressions stock and share are used. What is the difference between them? The word stock is the general term for company ownership. For example “I invest in American tech stocks like Apple and Facebook”. Share usually refers to the ownership stake in a company. For example “Yesterday I bought 100 Tesla shares.”