Should I Buy An IPO? (Initial Public Offering)

It can get interesting being amongst the first set of investors to buy a new stock, but do you know that investing in an IPO can be a risky venture? 

I walked into a supermarket recently and overheard 2 men talk about IPO’s. One of them tipped the other on a new deal his firm was floating. He worked as an underwriter and stated that those were the perks of being in the industry. You have insider news and firsthand information at your disposal.

It sure sounded exciting for the other friend, as it can get interesting being amongst the first set of investors to buy a new stock, but do you know that investing in an IPO can be a risky venture? IPO is a stock market launch and is usually the first time the stock of a private company is offered to the general public for subscription. They are usually issued by smaller and younger companies seeking to raise capital to expand, but can also be done by large privately owned firms looking to become publicly traded. This is also known as ‘’going public’’.

IPO’s can offer exciting opportunities for investors as it’s often the first chance to invest in a major brand. Until such company formally announces its intention to float on the stock market, IPO’s are usually hidden in secrecy with slight rumors being thrown around. They are usually not open to the public investor, but once confirmed, can happen very quickly, usually within a week or two.

The risks of this type of investment outweighs the pros as its always a tough nut trying to predict what the stock will do in its initial day of trading and in the near future. There is often little to no historical data to use to analyze past trends of the company, and only individual investors who love risk should invest in this venture.

The truth is that some IPO’s actually do very well, while others fail. The critical question is then to understand what drives the IPO’s performance once it is floated in the market. Stocks develop personalities over time, and when you are able to identify the personality of a stock, you can somewhat predict its behavior in both the bullish and bearish markets. IPO’s have not developed their personalities yet and even though supply and demand will work, you are better off trading with an older stock that has gone through market turbulence. It’s always best to avoid stocks with less than 6 months of trading history.

It is important to remember that not every IPO is bad. The danger lies in the assumption that they are good investment opportunities as some people assume it is an avenue to get in on the ground floor of owning a good company. Truth is before you even get to know about the company, there probably have been 2 to 3 rounds of private investment opportunities for ownership.

This is why it is a critical task to apply evaluation methods to the companies offering the IPO’s to enable you filter and discern which companies to put on your radar and those to avoid. If the IPO is valued the right way, then the first day’s price on the exchange would be a fair one, but these days, the pricing of stocks are usually off, leaving professional analysts with unending questions. An IPO is a 50/50 investment opportunity and should be approached with careful caution.