In this post, we cover a question I get emails on from time to time “should I invest in IPO for company X?”. Before we elaborate more on this, I’d like to remind everyone of what exactly an IPO is.
IPO, short for “Initial Public Offering”, is the name given to stocks that join the market for the very first time. In other words, when a company becomes public and makes its “debut” in the stock market by issuing stock – those stocks are called IPOs.
Some people invest in IPOs because they feel is a good idea to “get in early” and get stocks in a brand new company before the stock price goes up significantly – perhaps not realizing (or not caring) that stocks come with zero guarantee of going up in value.
Those same people buy with the goal of making tons of money quickly and usually are driven by greed and emotion, which is never a good idea in the stock market.
With that said, although there are some exceptions of companies that do in fact continue ascending in price after the IPO for many months or even years going forward; those circumstances are often the exception and not the norm. It will always depend on the business and not all publicly traded companies are created equal!!
Personally – If I do like a company and see strong potential – I wait at least a year or longer after a company has gone public to even consider investing in it. If a company is going to be good for the long term, there is absolutely zero rush in trying to get in “early”.
Here are a couple of the risks that come from investing in IPOs:
1. For the most part, the ONLY people that actually make money the day of an IPO launch are the private banks, private firms, private investors who purchased shares before the IPO launch. Businesses usually have agreements with private investors to ensure that those people make money right off the gate. Individual investors (people like you and I, for instance) don’t have that kind of advantage.
2. A lot of IPOs are pre-priced at a lower rate on purpose so that the private investors can make their money right away. As a matter of fact, the reason why many companies go public is to “pay off” the private investors that put money in the business when it was first starting out.
For example, company X makes an agreement with private investors to sell them shares at $8. Meanwhile, the stocks may debut at $20 in the market, allowing the private investor to make their profit and walk away if they choose to do so. Whether or not the price goes above the $20 for the average investor, is irrelevant to the private investor.
Bottom line – be careful with WHY you are investing in something, is it the hype around it or do you really see long term potential?
When a company first enters the market it is probably a good idea to wait things out for a bit of time (say 6 months to a year or longer) to see how the company performs as a public entity. Ideally, you want to follow the company for a few quarters or at least one full fiscal year to see if they are in fact making money for shareholders.
Always use your own judgment as an investor and be sure to weigh your options before making decisions for your stock portfolio. You may feel like you are ‘missing out’ on some initial profits but odds are you’ll actually be missing out on the stress and frustration that may come from buying something too high when it first comes out and then seeing it decline in value shortly thereafter.
Be patient with the market. Never invest out of hype and emotion. Always take your brain with you!
Tell me – have you ever invested in an IPO? What has been your experience? Would love to hear from you? Or, if you have questions in general about this – Let me know! Share in the comments or head over to the Facebook Group!
Cheers to Profits,
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