What is a hedge fund and how does it work?

Smiling muslim woman in a business meeting shaking someone’s hand.
Despite being called “hedge” funds, these investment vehicles are quite risky.

  • Hedge funds are pooled investment funds that aim to maximize returns and protect against market losses by investing in a wider array of assets.
  • Hedge funds charge higher fees and have fewer regulations, which can make them riskier.
  • Individuals, large companies, and pension funds may invest in hedge funds as long as they meet asset requirements.
  • Visit Insider’s Investing Reference library for more stories.

A hedge fund is a type of investment that’s open to accredited investors. The goal is for participants to come out ahead no matter how the overall market is performing, which may help protect and grow your portfolio over time. But hedge funds come with some risks, which you’ll need to consider before diving in.

What is a hedge fund?

A hedge fund is a private investment that pools money from several high-net-worth investors and large companies with the goal of maximizing returns and reducing risk. To protect against market uncertainty, the fund might make two investments that respond in opposite ways. If one investment does well, then the other loses money – theoretically reducing the overall risk to investors. This is actually where the term “hedge” comes from, since using various market strategies can help offset risk, or “hedge” the fund against large market downturns.

Understanding how hedge funds work

Hedge funds have a lot of leeway in how they earn money. They can invest both domestically and around the world and use just about any investment strategy to make active returns. For instance, the fund may borrow money to grow returns – known as leveraging – make highly concentrated bets, or take aggressive short positions.

But that flexibility also makes these investment vehicles risky, despite being called “hedge” funds. “There’s no transparency in hedge funds, and most of the time, managers can do whatever they want inside of the fund,” says Meghan Railey, a certified financial planner and co-founder/chief financial officer of Optas Capital. “So they can make big bets on where the market’s going, and they could be very wrong.”

The elevated risk is why only accredited investors – those deemed sophisticated enough to handle potential risks – can invest in this type of fund. To be considered an accredited investor, you’ll need to earn at least $200,000 in each of the last two years ($300,000 for married couples) or have a net worth of more than $1 million.

Hedge funds vs. the S&P 500

It’s tough to compare hedge funds to the S&P 500 because there are so many different types of hedge funds, and the markets they invest in might be global-oriented, says Chris Berkel, investment adviser and founder of AXIS Financial. “However, we can say that a broad index of hedge funds underperformed the S&P 500 over the last 10 to 15 years,” Berkel says.

Berkel points to data compiled by the American Enterprise Institute (AEI) from both the S&P 500 and the average hedge fund from 2011 to 2020. The data shows that S&P 500 index outperformed a sample of hedge funds in each of the 10 years from 2011 to 2020:

Year Average hedge fund S&P 500 Index
2011 -5.48% 2.10%
2012 8.25% 15.89%
2013 11.12% 32.15%
2014 2.88% 13.52%
2015 0.04% 1.38%
2016 6.09% 11.77%
2017 10.79% 21.61%
2018 -5.09% -4.23%
2019 10.67% 31.49%
2020 10.29% 18.40%
Source: American Enterprise Institute

“The S&P 500 is a systematic risk, which cannot be diversified away,” Berkel says. A hedge fund may provide some safeguards to your portfolio, which you won’t get with the S&P 500.

Hedge funds pay structure

Investors earn money from the gains generated on hedge funds, but they pay higher fees compared to other investments such as mutual funds. “The management fee is charged every year, regardless of performance, and the incentive fee is charged if the manager performs in excess of a specific threshold, typically its high-water mark,” Berkel says.

The fee is typically structured as “2% and 20%.” So in this example, participants pay an annual fee of 2% of their investment in the fund and a 20% cut of any gains. But recently, many hedge funds have reduced their fees to “1.5% and 15%,” says Evan Katz, managing director of Crawford Ventures Inc.

Once you put money into the fund, you’ll also have to follow rules on when you can withdraw your money. “During market turmoil, most hedge funds reserve the right to ‘gate,’ or block, investors from redeeming their shares,” Berkel says. “The rationale is that it protects other investors and helps the fund manager maintain the integrity of their strategy.”

Outside of these lockup periods, you can usually withdraw money at certain intervals such as quarterly or annually.

Are hedge funds regulated?

Hedge funds are regulated, but to a lesser degree than other investments such as mutual funds. Most hedge funds aren’t required to register with the Securities and Exchange Commission (SEC), so they lack some of the rules and disclosure requirements that are designed to protect investors. This can make it difficult to research and verify a hedge fund before investing in this type of product. However, hedge fund investors are still protected against fraud, and fund managers still have a fiduciary duty to the funds they manage.

The financial takeaway

Investing in hedge funds could help your portfolio grow, but you wouldn’t want to concentrate your entire nest egg here. Hedge funds are illiquid, require higher minimum investments, are only open to accredited investors, and have fewer regulations than other types of investments, making them a risky endeavor.

“Start by consulting a financial professional who’s not incentivized to sell you a hedge fund,” Railey says. “Read the offering memorandum, ask some critical questions about past performance, and ask what their strategy is going forward.” Then, she suggests, allocate no more than 5% to 10% of your overall investable assets into a hedge fund.

If you’re not an accredited investor or you’d rather look at different investments, you still have options outside of your retirement accounts. For instance, you might decide to open an online brokerage account. Keeping your money in the market over time – instead of trying to buy and sell based on market conditions – can be a good strategy, Railey says. “Just start simple, stay simple, and add on complexity as time goes and you have more experience to be able to understand the difference.”

What is net worth? How it can be important indicator of your financial well-beingWhat are the safest investments? 7 low-risk places to put your money – and what makes them soHow to invest in the S&P 500 – a guide to the funds that mimic the influential index’s makeup and movesHow to diversify your portfolio to limit losses and guard against risk

Read the original article on Business Insider

What is a hedge fund and how does it work?

Smiling muslim woman in a business meeting shaking someone’s hand.
Despite being called “hedge” funds, these investment vehicles are quite risky.

  • Hedge funds are pooled investment funds that aim to maximize returns and protect against market losses by investing in a wider array of assets.
  • Hedge funds charge higher fees and have fewer regulations, which can make them riskier.
  • Individuals, large companies, and pension funds may invest in hedge funds as long as they meet asset requirements.
  • Visit Insider’s Investing Reference library for more stories.

A hedge fund is a type of investment that’s open to accredited investors. The goal is for participants to come out ahead no matter how the overall market is performing, which may help protect and grow your portfolio over time. But hedge funds come with some risks, which you’ll need to consider before diving in.

What is a hedge fund?

A hedge fund is a private investment that pools money from several high-net-worth investors and large companies with the goal of maximizing returns and reducing risk. To protect against market uncertainty, the fund might make two investments that respond in opposite ways. If one investment does well, then the other loses money – theoretically reducing the overall risk to investors. This is actually where the term “hedge” comes from, since using various market strategies can help offset risk, or “hedge” the fund against large market downturns.

Understanding how hedge funds work

Hedge funds have a lot of leeway in how they earn money. They can invest both domestically and around the world and use just about any investment strategy to make active returns. For instance, the fund may borrow money to grow returns – known as leveraging – make highly concentrated bets, or take aggressive short positions.

But that flexibility also makes these investment vehicles risky, despite being called “hedge” funds. “There’s no transparency in hedge funds, and most of the time, managers can do whatever they want inside of the fund,” says Meghan Railey, a certified financial planner and co-founder/chief financial officer of Optas Capital. “So they can make big bets on where the market’s going, and they could be very wrong.”

The elevated risk is why only accredited investors – those deemed sophisticated enough to handle potential risks – can invest in this type of fund. To be considered an accredited investor, you’ll need to earn at least $200,000 in each of the last two years ($300,000 for married couples) or have a net worth of more than $1 million.

Hedge funds vs. the S&P 500

It’s tough to compare hedge funds to the S&P 500 because there are so many different types of hedge funds, and the markets they invest in might be global-oriented, says Chris Berkel, investment adviser and founder of AXIS Financial. “However, we can say that a broad index of hedge funds underperformed the S&P 500 over the last 10 to 15 years,” Berkel says.

Berkel points to data compiled by the American Enterprise Institute (AEI) from both the S&P 500 and the average hedge fund from 2011 to 2020. The data shows that S&P 500 index outperformed a sample of hedge funds in each of the 10 years from 2011 to 2020:

Year Average hedge fund S&P 500 Index
2011 -5.48% 2.10%
2012 8.25% 15.89%
2013 11.12% 32.15%
2014 2.88% 13.52%
2015 0.04% 1.38%
2016 6.09% 11.77%
2017 10.79% 21.61%
2018 -5.09% -4.23%
2019 10.67% 31.49%
2020 10.29% 18.40%
Source: American Enterprise Institute

“The S&P 500 is a systematic risk, which cannot be diversified away,” Berkel says. A hedge fund may provide some safeguards to your portfolio, which you won’t get with the S&P 500.

Hedge funds pay structure

Investors earn money from the gains generated on hedge funds, but they pay higher fees compared to other investments such as mutual funds. “The management fee is charged every year, regardless of performance, and the incentive fee is charged if the manager performs in excess of a specific threshold, typically its high-water mark,” Berkel says.

The fee is typically structured as “2% and 20%.” So in this example, participants pay an annual fee of 2% of their investment in the fund and a 20% cut of any gains. But recently, many hedge funds have reduced their fees to “1.5% and 15%,” says Evan Katz, managing director of Crawford Ventures Inc.

Once you put money into the fund, you’ll also have to follow rules on when you can withdraw your money. “During market turmoil, most hedge funds reserve the right to ‘gate,’ or block, investors from redeeming their shares,” Berkel says. “The rationale is that it protects other investors and helps the fund manager maintain the integrity of their strategy.”

Outside of these lockup periods, you can usually withdraw money at certain intervals such as quarterly or annually.

Are hedge funds regulated?

Hedge funds are regulated, but to a lesser degree than other investments such as mutual funds. Most hedge funds aren’t required to register with the Securities and Exchange Commission (SEC), so they lack some of the rules and disclosure requirements that are designed to protect investors. This can make it difficult to research and verify a hedge fund before investing in this type of product. However, hedge fund investors are still protected against fraud, and fund managers still have a fiduciary duty to the funds they manage.

The financial takeaway

Investing in hedge funds could help your portfolio grow, but you wouldn’t want to concentrate your entire nest egg here. Hedge funds are illiquid, require higher minimum investments, are only open to accredited investors, and have fewer regulations than other types of investments, making them a risky endeavor.

“Start by consulting a financial professional who’s not incentivized to sell you a hedge fund,” Railey says. “Read the offering memorandum, ask some critical questions about past performance, and ask what their strategy is going forward.” Then, she suggests, allocate no more than 5% to 10% of your overall investable assets into a hedge fund.

If you’re not an accredited investor or you’d rather look at different investments, you still have options outside of your retirement accounts. For instance, you might decide to open an online brokerage account. Keeping your money in the market over time – instead of trying to buy and sell based on market conditions – can be a good strategy, Railey says. “Just start simple, stay simple, and add on complexity as time goes and you have more experience to be able to understand the difference.”

What is net worth? How it can be important indicator of your financial well-beingWhat are the safest investments? 7 low-risk places to put your money – and what makes them soHow to invest in the S&P 500 – a guide to the funds that mimic the influential index’s makeup and movesHow to diversify your portfolio to limit losses and guard against risk

Read the original article on Business Insider

What is APR?

Business woman on a laptop making calculations with a cell phone and calculator.
Even a small difference in APR can really add up when you’re borrowing any sum of money.

When you use a credit card or take out a loan, your lender will charge you interest for the privilege of borrowing the money. They’ll typically present this cost as an annual percentage rate, or APR, which shows your total cost of borrowing – plus fees. Because they help you compare offers and find the best deal, it’s important to know how they work.

What is APR?

An APR is the cost of borrowing money expressed as a yearly rate. While the APR is usually applied to consumer debt, like credit cards and loans, it can also represent the return on an investment you make.

“In most cases, [it’s] the single most important factor to understand when both borrowing or saving money,” says Brian Stivers, an investment adviser and founder of Stivers Financial Services in Knoxville, Tennessee. That’s because it helps you “understand the true cost of borrowing money and not just the monthly payment.”

For instance, you can use APRs to compare the borrowing costs on a mortgage. Let’s say Lender A and Lender B both offer an interest rate of 2.75% and quote you a list of fees you’ll pay on the loan.

It can be tough to compare those fees because they may go by different names – plus, you’ll have to crunch the numbers. But the APR takes those fees, along with the interest rate, and translates the information into a unit you can quickly measure. In this example, let’s say Lender A charges an APR of 2.90%, while Lender B quotes an APR of 3.50%. At a quick glance, you can tell Lender B’s loan includes more costs outside of what you’re borrowing.

Lender A Lender B
Interest rate 2.75% 2.75%
APR 2.90% 3.50%

While the 0.60% difference may seem insignificant in this example, it can really add up if you’re borrowing a large sum of money – like a mortgage, for example.

APR 30-yr mortgage Monthly payment Total mortgage
Lender A 2.90% $300,000 $1,249 $449,528
Lender B 3.50% $300,000 $1,347 $484,968

In the example above, that 0.60% difference means you’d pay $35,440 more if you’d went with Lender B. This is the power of APR.

That being said, it’s always a good idea to calculate the interest you’ll pay over the life of a loan when the interest rates are different. You might end up paying less interest on a loan that has a higher APR, and you’ll have to figure out if the higher fees are worth it.

How does APR work?

On a loan, APR includes the interest rate plus any fees the lender charges, such as origination, legal, or underwriting fees. APR isn’t so complicated on a credit card – it’s just the interest rate stated as a yearly rate.

The APR was designed to give borrowers more information about what they’re really paying to borrow money. Thanks to the federal Truth in Lending Act (TILA), lenders are required to disclose the APR on every consumer loan agreement before the borrower signs the contract. The TILA disclosure also includes other important terms, including:

  • Finance charge, or the cost of credit expressed as a dollar amount.
  • Amount financed, which is typically the dollar amount you’re borrowing.
  • Payment information, such as the monthly payment, the total number of payments you’ll make, and the sum of all your payments combined (which includes principal plus financing costs).
  • Other information, such as late fees and prepayment penalties.

When you apply for the loan and receive the TILA disclosure, it might be written into the loan contract. It’s a good idea to review the whole contract and make sure you understand the terms before signing on the dotted line.

How is APR calculated?

The formula for calculating APR is as follows:

Formula graphic for how to calculate APR (Annual Percentage Rate)

Where n = number of days in the loan term.

Check out one example to see how it works. Let’s say you take out a $5,000 personal loan with a two-year loan term and a $400 origination fee. The total interest you pay over the life of the loan equals $980. Follow these steps to calculate the APR:

  1. Add up the fees and interest: $400 + $980 = $1,380
  2. Divide that number by the principal, or the amount you’re borrowing: $1,380/$5,000 = 0.276
  3. Divide by the number of days in the loan term: 0.276/730 = 0.00037808219
  4. Multiply what you’ve got by 365: 0.00037808219 x 365 = 0.138
  5. Now multiply by 100 to find the APR: 0.138 x 100 = 13.8%

What is a good APR?

A good APR is simply one that’s affordable to you, but there are some general rules you can follow when shopping around. For instance, the National Consumer Law Center says APRs over 36% are unaffordable.

But it also depends on the type of financial product and loan term. The APR on an auto loan might be higher than one on a mortgage, but the longer term on a mortgage means you’ll likely pay more interest over time.

APR varies with the type of financial product you’re taking out, but it also depends on the lender’s overhead costs. For example, an online lender often has lower expenses than a large bank with brick-and-mortar locations. “With lower expenses, they can generally charge less APR to achieve their profit margin,” Stivers says, “than a larger lending institution with many locations and more employees.”

APR vs. APY

Here’s what to know when comparing APR with APY:

APR APY
  • An interest rate, plus fees that are stated as a yearly rate
  • Usually applies to money you borrow
  • A lower APR helps you save money and is based off your credit
  • Different types of APRs depending on the financial product
  • A yearly interest rate that includes the compounding effect
  • Usually applies to money you earn on an investment
  • A higher APY helps you earn more money
  • Doesn’t include fees

APR vs. interest rate

Some people think the APR and the interest are one and the same, but they have different meanings when it comes to loans. “Interest rates only reflect the percentage of interest charged on the loan,” Stivers says. “The APR includes additional costs associated with the loan.”

Some of these additional costs include discount points, loan origination fees, and other underwriting fees.

Here’s a good way to think about it: You’ll use the interest rate to calculate your monthly payment, and use the APR to help gauge the entire cost of the loan and compare offers.

Types of APR

Several credit products, like mortgages and auto loans, only come with one APR. The APR may be fixed, which means it never changes, or variable, in which it may go up or down over time.

Other types of debt, like credit cards, may charge several APRs. That’s because “lenders, in general, have different APRs for different risk,” Stivers says. “For example, a balance transfer from one credit card to another generally has lower risk since there is a history of the consumer paying the payment to the original credit card company. So, the new credit card may discount their APR due to the perceived less risk than a brand-new purchase with no payment history.”

A credit card may charge a different APR based on the type of transaction you’re doing:

  • Purchase APR: applies to the purchases you make with the credit card. “Credit card companies will often use a lower APR, sometimes 0%, for a short period of time – six months to one year – to entice a consumer to use their credit,” Stivers says.
  • Balance transfer APR: applies to debts you transfer to your credit card. Some credit cards offer a low promotional APR on balance transfers.
  • Cash advance APR: applies when you borrow cash against the credit line. This APR is usually higher than the purchase APR.
  • Penalty APR: applies when you make a late payment or miss one entirely. The credit card issuer has to follow certain rules before applying a penalty APR to your account.
  • Introductory/promotional APR: a low APR that applies to certain transactions – like purchases or balance transfers – for a limited amount of time. The time frame varies with each card but is usually anywhere from 12 to 18 months.

Keep an eye on your credit card balance when it comes with a promotional APR, though. “The credit card companies realize few consumers will pay off the debt in the allotted time,” Stivers says, “and will then raise the APR to much higher rates at the end of the promotional period of time.”

The financial takeaway

Annual percentage rate is a helpful way to measure the total cost of borrowing. On a loan, it’s based on the lender’s interest rate plus fees they charge, while on a credit card it’s simply the rate expressed as a yearly rate. It’s important to know the APR before taking out a credit card or loan because you can use this number to compare offers – and finding the best deal can help you save money.

What is simple interest? A straightforward way to calculate the cost of borrowing or lending moneyUnderstanding the way compound interest works is key to building wealth or avoiding crushing debt. Here’s how to make it work for youThe LIBOR is a global interest rate that affects the rates of many loans and investments. Here’s how it’s set, and why it’s slated to endDividends are payments made by a company to its shareholders – here’s how they work

Read the original article on Business Insider

Companies are going public more than ever – here’s how to buy IPO stock

Buying IPO stock
Both 2020 and 2021 have produced record numbers of IPOs. See how to buy IPO stock.

  • IPOs trade on exchanges like NYSE and NASDAQ, and you can purchase them through online brokerages.
  • Generally speaking, IPOs are a risky investment.
  • Companies also go public through “direct listings” or special purpose acquisition companies (SPACs).
  • Visit Insider’s Investing Reference library for more stories

The market for newly public companies is an exciting one. Who wouldn’t want to enter the “ground floor” of a company with the opportunity to profit from its future growth?

But investing in an initial public offering (IPO) can be confusing, if not downright risky. If you’re thinking about investing in IPOs, it’s important to remember that many IPO stocks underperform broader market benchmarks in the long-run. Not all IPOs become unicorns.

But profits await for those who pick the right IPO stock. While financial institutions, company insiders, and wealthy clients typically have greater access to IPOs, the average retail investor can also get in on the action.

But just because you can invest in IPOs doesn’t mean that you should. Here’s what you need to know when deciding on an IPO stock.

Understanding the IPO process

With an IPO, a private company “goes public” by offering its stock for the first time on a stock exchange, like the NASDAQ or NYSE. In order to make a registered offering, a company must file a registration statement with the US Securities and Exchange Commission (SEC).

The IPO process differs from a direct public offering (DPO) in which a company directly lists its stock on the market.

Companies go public primarily to raise capital or expand operations. With traditional IPOs, businesses hire an underwriter – usually an investment bank – who leads and directs the IPO, drafting the company’s prospects, setting the IPO price and drumming up interest from potential investors, known as an IPO roadshow.

Why IPOs have been historically exclusive

IPOs have long been more accessible to institutional entities (eg. hedge funds, mutual funds, insurance companies) and high-net-worth clients with more capital to trade.

While company executives (and sometimes employees) also have access to IPO shares, investment bank underwriters typically give larger amounts of shares to institutional clients because they believe that they’re better equipped to purchase the shares and assume any risk over the long-term, according to the SEC.

But several online brokerages have created ways for retail investors to get in on the action. If you don’t want to wait until a company’s IPO shares have listed on the exchange, you may be able to get in at the offering price.

How things are changing for the retail investor

Many discount brokerages have given retail investors more access to IPOs. These online platforms allow you to “participate in an IPO,” but you’ll usually need to meet several eligible requirements before you can request shares.

Some brokerages have minimum account size mandates, and most require you to read a company’s prospectus and financial disclosures before you move forward in the IPO process.

Why IPOs are popular with investors

IPOs can be intriguing for a number of reasons. For one, they afford investors the opportunity to get in on their favorite companies at the lowest price and capitalize off of first-day price surges. Once the shares are available to the public, they can also be financially rewarding to those who participated in the IPO and bought in at its offer price.

However, IPOs also carry notable risks and may not be ideal for beginner investors with long-term horizons. But if you’re still interested in purchasing stock before it lists on the exchange, keep reading to see how to get started.

How to buy IPO stock

The SEC lists two ways for retail investors to to get in on IPOs. You can participate in an IPO, or, more commonly, purchase the shares when they are sold in the days following the IPO.

To better understand the two ways to buy IPO stock, it helps to know the difference between offering price and opening price:

  • Offering price: Though typically set aside for accredited investors and institutional clients with more money to invest, you can also purchase shares of the stock at its offering price if you’re a client of the IPO’s underwriter. And though it’s more difficult to get in as a retail investor, you may still be able to participate in the IPO, depending on your broker.
  • Opening price: Also known as the go-public price, this price represents the value at which the public can purchase shares on an exchange. You can buy shares through your brokerage after they’re resold to the public exchanges, or you can participate in the IPO if your brokerage allows.

If you wish to participate in the IPO at offering price, here’s how to do it.

1. Do your research

IPO research can be daunting since there isn’t any historical data or market performance history behind the company at hand. But thanks to the SEC, all companies must file a S-1 form to register their offerings. This form basically provides background information on the company, financial information, and a prospectus on the offering itself.

You can also utilize resources like the Nasdaq calendar which provides the latest details on IPOs.

2. Check your eligibility with your brokerage

All brokerages have different requirements for participating in an IPO, so make sure to do your due diligence before getting started. For instance, when it comes to minimum account size, Fidelity requires individuals to have either $100,000 or $500,000 in household assets to qualify (see more information on Fidelity’s process here).

3. Submit indication of interest (IOI)

Brokerages may also require you to fill out an indication of interest (IOI) form to determine how many shares you’d like to purchase. While the IOI window lasts for multiple days, brokerages like Fidelity require IOIs to be for a minimum of 100 shares.

4. Confirm your order

After you’ve submitted and entered your IOI, you’ll need to confirm the IOI in order to receive shares. Though the process varies per brokerage, you can generally do this by locating the IPO deal you’re interested in and clicking “participate.”

You’ll then need to confirm any open IOIs to officially submit your order.

The risks of buying IPO stock

While 2020 was a big year for IPOs, 2021 has proven to be an even bigger year. There have already been 497 IPOs in the US (there were only 72 IPOs by the same time last year), according to StockAnalysis.com.

But it’s important to consider the risks behind these investments. IPO stocks are extensions of companies that haven’t had long-standing track records in markets, and many investors can confuse popular demand with intrinsic value. For this reason, you should do your research and analyze any company disclosures before moving forward.

In addition, when investing in these newly converted startups and private companies, it’s important to ask yourself how much risk you’re willing to take on. IPOs are generally volatile, so it’s wise to exercise caution when it comes to the first-day pops and prices surges. Companies that are truly valuable will remain that way over the long-term.

That’s not to say that IPO stocks can’t be rewarding, but it’s wise to consider the differences between these investments and blue-chip stocks (blue-chip stocks are popular companies with long track records of success in the markets and their respective industries).

Alternatives to IPOs

Even though retail investors are getting more access to IPOs, it can still be difficult to get in game. However, there are three other ways to capitalize off new stock. These include (but aren’t limited to) the following:

  • Direct listings: A direct listing takes place when a company immediately makes its stock available on exchanges without consulting an investment bank to underwrite an IPO. In fact, popular cryptocurrency exchange Coinbase used this approach when it went public in early April 2021.
  • Special purpose acquisition companies (SPACs): SPACs, on the other hand, are blank-check companies that raise funds by acquiring and merging with other private companies that want to become public.
  • IPO ETFs: IPO ETFs contain a diversified blend of companies that recently transitioned into the public markets. This is generally safer than investing in a single IPO since IPO ETFs lower your risk by spreading your money across multiple IPOs. If you’re interested in the hype and short-term demand of single IPOs, these may not be ideal. IPO ETFs make more sense over the long haul.

The financial takeaway

You’ll have multiple options for investing in IPO stocks as a retail investor. If you’d like to participate in an IPO, make sure to compare the eligibility requirements between different apps and review company prospectuses if possible.

But while many companies utilize the IPO model, some private companies also go public through direct listings or with the help of a SPAC.

Nonetheless, it’s wise to do thorough research before buying stake in a newly listed company. IPO investing can be risky even if it’s with high profile companies who’ve recently crossed over into the public realm. But no matter which investment type you choose, experts recommend only investing what you can afford to lose.

An IPO is when a company starts trading on a public exchange, offering investors a chance to get in on a hot new stockWhat is diversification? A portfolio strategy that uses a variety of investments to limit riskThe best stock trading apps of 2021How many stocks should you own in your portfolio? Why there’s no single ‘right’ answer

Read the original article on Business Insider