Every so often, a company captures everyone’s attention.

A revolutionary business announces plans to go public. The headlines appear. Investors get excited. Everyone starts asking the same question:

“Could this be the next Amazon?”

That is the attraction of an IPO.

But before investing, it is important to understand what an IPO actually is, why companies choose to do it, and whether investors are really getting the opportunity they think they are.

IPO stands for Initial Public Offering.

It is the process where a privately owned company sells shares to the public for the first time and becomes listed on a stock exchange.

Before an IPO, ownership is usually limited to founders, employees and private investors.

After an IPO, everyday investors can buy shares and become part owners of the business.

Companies choose to IPO for several reasons:

• To raise money for future growth
• To allow early investors to sell some of their shares
• To reward employees who own shares
• To create a public market for the company

A successful IPO can help a company expand and continue growing.

But there is another side to consider.

When you buy shares, someone else is selling.

Often those sellers include early investors who supported the company years before the public ever had access. They invested when the business was smaller, riskier and the future was far less certain.

By the time a company reaches the stock market, years of growth may have already taken place. A great company does not automatically mean a great investment.

The price you pay matters.

SpaceX is a fascinating modern example.

Many investors would love the opportunity to own shares in a company associated with reusable rockets, satellite internet and the future of space exploration.

But SpaceX was founded in 2002.

When SpaceX becomes publicly available, ordinary investors will not be investing at the beginning of the journey. They will be investing after decades of development, breakthroughs and private investment.

In fact, some investors have already been able to access this growth.

For example, Scottish Mortgage Investment Trust, managed by Baillie Gifford, first invested in SpaceX in 2018 with an initial investment of around $200 million. That holding has since grown substantially and is now reportedly worth approximately $3.5 billion.

Investment trusts have a unique advantage compared with many traditional funds because they are able to hold up to 60% of their portfolio in private companies. This has allowed some UK investors to gain exposure to businesses like SpaceX years before a potential IPO.

This highlights an important change in modern markets. Companies are staying private for longer, meaning much of the early growth can happen before everyday investors ever get the chance to buy shares directly.

Future investors may still do extremely well.

But they would be buying a more mature company at a price that already reflects years of success.

The good news is no.

A globally diversified index fund automatically captures successful companies after they enter the market. You do not have to predict the winners in advance.

As companies grow and become more valuable, they naturally become a larger part of the index.

Instead of trying to find the next great company, you can simply own thousands of companies and allow the market to decide.

IPOs are exciting — and I’ll be honest, I have personally been very tempted by the idea of investing in SpaceX when it becomes publicly available. Companies like this represent innovation, ambition and human progress.

But excitement and investment returns are not the same thing.

Successful investing is rarely about chasing the newest opportunity.

More often, it comes from patience, discipline and giving great companies enough time to compound.

Sometimes boring investing produces surprisingly exciting results.

So, for now, I’m sticking to my long-term investment plan.

No chasing. No constantly changing direction. Just consistently investing, staying patient and allowing time and compounding to do the hard work.

The Compounder
Long-term investing made simple.