Defining the Future of Finance
There is an abundance of new acronyms and words these days in the financial world and stock market. It can be overwhelming and challenging to keep up with these unfamiliar terms and to determine what the future of finance will look like. How does this trendy terminology relate to your investments, financial plan and the dental industry? Stay tuned.
An IPO, or initial public offering, is the process of a private corporation issuing new stock shares on a public exchange, which allows the company to raise capital from public investors. The company must go through the SEC (Securities and Exchange Commission) and underwriting, which typically takes 12-18 months. Stock price depends on market conditions and investor interest at the time of listing, which can be very volatile.
Recent companies, such as Airbnb (NASDAQ: ABNB), DoorDash (NYSE: DASH) and Bumble (NASDAQ: BMBL) have chosen the IPO route. The US Healthcare Services IPO market might not be flooded with dental stocks to buy, but there are some companies that are paving the way, such as Henry Schein (NASDAQ: HSIC), Align Technologies (NASDAQ: ALGN) and Smile Direct Club (NASDAQ: SDC). Although exciting, an IPO isn’t always a favorable investment, so extensive research should be done before purchasing. IPO stock prices may sharply decrease after their lock-up period, often fluctuate dramatically and can underperform industry benchmarks.
A SPAC, or special purpose acquisition company, offers an alternative to the IPO process, by merging with the private corporation to bring the company public. A SPAC is a shell company set-up with the sole purpose to raise funds to acquire another company. The merger is usually a much faster process than an IPO, typically taking 3-6 months. The stock price is better known ahead of time, as it is negotiated with the SPAC before the transaction closes. DraftKings (NASDAQ: DKNG) and QuantumScape (NYSE: QS) are two distinguished companies that have gone public through the SPAC merging process.
SPACs have become popular as we have faced extreme market volatility due to the global pandemic and by allowing companies to go public much quicker and transparent than the IPO route. Investments in SPAC are speculative and risky because investors do not know ahead of time what company will be acquired.
Other companies that have strong brand awareness and do not need substantial additional capital have chosen to go public by listing existing shares directly to an exchange, including Spotify (NYSE: SPOT) and Coinbase (NASDAQ: COIN).
A meme itself is a piece of content online, such as an image or video that is spread quickly by internet users, usually for its humor. A meme stock often sees a dramatic price increase in a short amount of time due to attention from social media and online forums, such as Twitter and Reddit, not specifically from the company’s value or performance. These price surges are regularly followed by steep declines due to their artificial value.
Your first thought probably is the GameStop (NYSE: GME) frenzy, where retail investors drove the price of the stock to unexpected all-time highs, causing large hedge fund companies that bet the stock price would drop to lock in millions of dollars of losses. The stock has significantly dropped since, but young investors continue to test their influence on the market by banding together to increase cash inflows to specific meme and penny stocks. Another recent example is Dogecoin, a cryptocurrency featuring the face of a Shiba Inu, that was popularized from an online meme and backing from Elon Musk.
There is no doubt these events have led to an increase in retail investing, especially via easily accessible apps, such as Robinhood and E*TRADE. Day trading can be thrilling, but most day traders end up losing money.
Cryptocurrency is a digital currency that uses an online ledger to secure transactions. By using technology called blockchain, transactions are managed and stored securely. With over 6,700 different types of cryptocurrencies, the most common types include Bitcoin and Ethereum.
However, even the global dental industry has jumped on the bandwagon and created their own blockchain solution digital currency called Dentacoin (DCN) that aims to provided a rewards program for dentists and their patients that write public reviews.
Supporters of cryptocurrencies see them as the currency of the future due to its decentralization process, security and removal of central banks. Speculators doubt these claims and the true value of the currency, as no cash flow is generated. Crypto prices have been very volatile, and the IRS has determined virtual currency transactions are taxable just like transactions in any other property.
A NFT is a non-fungible token, which is a unique digital asset that is exclusive to the owner and stored on the blockchain online database. Once you own an NFT, it is yours for life. NFTs can be images, tweets, memes, games, etc., and allow artists to authenticate their digital artwork. Think of collectors’ items or famous paintings, but using digital storage to maintain legitimacy. Currently, NFTs can be purchased with cash or cryptocurrency through a crypto wallet. Many tokens are selling for millions of dollars. Like any investment, it is important to research before diving in to understand the risks associated.
Do these strategies belong in my investment portfolio?
It is an exciting and interesting time to be an investor, and we will see where the years ahead take us, as technology continues to evolve our world. New and flashy ways to invest may seem intriguing and profitable, but it is important to remember your investment philosophy and goals. These strategies often carry a lot of risk and uncertainty.
Investing is a long-term plan and you should never put more money than you are willing to lose in speculative investments. If you choose to invest in these strategies, allocate only a small portion of your portfolio, such as 1%. Always do you research ahead of time and reach out to a trusted financial planner if you need guidance. Don’t let the fear of missing out force you to change your investing approach and make irrational, emotional decisions with the money you worked hard to earn.