Q: How can an IPO be "underpriced"? -- D.D., Kenosha, Wis.
A: Companies traditionally "go public" – introducing their shares for trading on the public stock market – via initial public offerings (IPOs).
Here's how it typically works: The company hires an investment bank (like Goldman Sachs), which may bring in some other banks. The company and the banks decide how they'll price the shares. Let's say they've determined the company is worth $10 billion and they're selling 10% of it to the public to raise $1 billion (less the banks' fees). They might, say, sell 100 million shares at $10. On the first day of trading, initial buyers will get their shares at the offering price. That raises the expected sum for the company ($1 billion, in our example). After that, the shares will be traded on the market, directly between buyers and sellers, without raising any more money for the company. If there's great demand, buyers will be willing to pay more, sending the price up.
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When a company's shares soar on its IPO day, that suggests that they were underpriced; it could have set a higher initial price, and that would have generated more money for the company.
Q: Do I need to work for a company to buy its stock? – L.A., Greenwood, S.C.
A: Not at all. Any of us can buy any stock that's publicly traded – as long as we can afford it. You'll probably need a brokerage account, though. (Learn more about brokerages at Broker.Fool.com.) However, if you work for a publicly traded company, you might be granted shares of stock or stock options, or you might be able to buy its shares at a discount.
Do You need a 529 plan? If you're saving money for educational expenses, you may want to look into 529 plans, which come in two key varieties: prepaid tuition plans and college savings plans. With prepaid tuition plans, you pay for all or some of the cost of college tuition, usually at an in-state public school, essentially locking in today's lower rates. (If the student decides to attend an out-of-state or private school, though, you may lose some of the value of the account.)
There's a separate Private College 529 Plan available, too, with nearly 300 private colleges and universities participating. Note that 529 prepaid tuition plans are not guaranteed by the U.S. government, so look into risks, and see if any plans you're considering are guaranteed at the state level. With savings plans, you simply accumulate money in an account over time, where it grows free of federal taxes (and often free of state taxes, as well). When funds are withdrawn for qualifying college expenses, they're also free of federal taxes. Each plan has one custodian and one beneficiary, though many people can contribute to the account for the future student's benefit.
Every state but Wyoming has one or more 529 savings plans, and you can choose to save with just about any of them – you don't have to use your own state's. (Compare plans at SavingforCollege.com: See what investment options each offers, what fees each charges and what other perks or benefits each has.) The funds in the 529 account can be used at more than 6,000 U.S. and foreign colleges and universities.
A key advantage of 529 plans over other education savings accounts is that they have high contribution limits – often allowing an account value of $300,000, $500,000 or even more. (Read up on tax issues if you want to contribute more than $15,000 in a single year.)You can learn more about 529 plans and other savings plans at CollegeSavings.org and MappingYourFuture.org/saving. The Securities and Exchange Commission website – SEC.gov – offers 529 information, too.
My smartest investment
Halfsies. My smartest investment move was investing half of my first year's salary. – S.S., online
The Fool responds: That's a super-smart move, indeed! A common rule of thumb is to sock away 10% of your income, but that's often far too little for those starting to invest later in life. Young folks might get away with saving only 10% annually, but if you're able to save 50% even once, or a few times – perhaps while living with your parents or roommates – it can be an extremely powerful financial move. That's because the dollars you invest earliest have the longest period in which to grow for you.
Imagine having invested $10,000 when you're 25; it can grow at an annual average of 8% over 35 years to be nearly $148,000 when you're 60. If that $10,000 is invested at age 40, though, it will only have 20 years to grow, reaching about $46,600 by age 60.
It's not enough to just be saving aggressively; you need to be investing all that money effectively, too. Long-term dollars are likely to grow fastest in the stock market, and a low-fee broad-market index fund, such as one that tracks the S&P 500 index, is a simple and powerful way to build wealth through stocks. Starting an investment portfolio early can make the rest of your financial life much easier and less stressful, with funds available for down payments and retirement.
Name that company: I trace my roots back to San Francisco in 2007, a time when hotel rooms were scarce due to a big conference. Two of my co-founders lived there and were broke, so they rented out air mattresses in their apartment to three conference attendees. Today I'm a major force in the hospitality arena, with 4 million people having hosted more than 800 million guests around the world. I went public via an IPO in late 2020 and was recently valued at nearly $109 billion – more than Marriott International, Hilton Worldwide, Hyatt Hotels and InterContinental Hotels Group combined. Who am I?
Last week's trivia answer: I trace my roots back to 1903, when my namesake bought a struggling curtain rod company in Ogdensburg, New York. I grew over time, in part via dozens of acquisitions. Today I'm based in Atlanta. With a market value recently topping $11.5 billion, I'm a global consumer brand powerhouse, with some names you might know: Rubbermaid, Paper Mate, Sharpie, Dymo, EXPO, Parker, Elmer's, Coleman, Marmot, Oster, Sunbeam, FoodSaver, Mr. Coffee, Rubbermaid Commercial Products, Graco, Baby Jogger, NUK, Calphalon, Contigo, First Alert, Mapa, Spontex and Yankee Candle. I also used to own Jostens, the class ring company. Who am I? (Answer: Newell Brands
The Motley Fool Take
Red Can, Blue Chip: If you're looking for steady income from a stock, pop open some shares of Coca-Cola (NYSE: KO). Coca-Cola stock was recently sporting a healthy dividend yield of over 3.1%, and that payout has been increased for 59 consecutive years.Coca-Cola might seem like a risky investment, since soda consumption rates have been declining in recent years. However, via acquisitions and internally developed products, the company has been expanding its beverage portfolio into fruit juices, teas, sports drinks, bottled water, coffee and even alcoholic drinks.
It's also refreshed its flagship sodas with lower-calorie versions, new flavors, smaller serving sizes, and new variants such as Coca-Cola Energy and Coca-Cola With Coffee. These moves, along with an investment in Monster Beverage and the takeover of coffee company Costa Limited, enabled Coca-Cola to aggressively evolve and expand its business.
The company's revenue declined 11% in 2020, as the pandemic shut down restaurants and other businesses that served its drinks. This year, analysts expect Coca-Cola's revenue and earnings per share to rise 11% and 10%, respectively, as the pandemic eases and businesses reopen. The stock recently seemed reasonably valued, with a forward-looking price-to-earnings (P/E) ratio near 24, and it should be a fairly safe investment for retirees and others looking for steady growth and income.
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