The very first time that a company’s stock goes on sale to the public is known as its initial public offering. Many investors dream about the fortunes to be made by getting in early on an IPO, but knowing which stock will make money in the months following an initial offering is more tricky than it may seem. Unsophisticated investors face the risk of losing money in the first few years after an IPO, according to experts at the University of Delaware’s Alfred Lerner College of Business & Economics.
How IPOs Generate Wealth
When a company decides to go from private to public with an IPO, there’s an opportunity to make money if the stock value rises on the first day of trading and in the months and years that follow. IPO investors who are looking for a very quick return are known as flippers because they hope to buy and sell on the first day of trading. Long-term investors are more interested in IPO shares that increase steadily over time. If you’re planning on investing in an IPO, you should decide which kind of investor you want to be.
Do Your IPO Homework
The reason many individual investors lose money on IPOs compared to institutions like banks and brokerage firms is that institutions spend more time studying the finances of the firms offering IPOs. For example, a company with negative earnings is a red flag that experienced investors will recognize as the sign of a low-quality IPO. Unfortunately, many individual investors act on emotion rather than knowledge about the history and current situation for a company issuing an IPO. If you’re thinking about investing in an IPO and don’t have a financial background, pay attention to publicly available information about the company. If a company has a poor performance history, you may want to adopt a wait-and-see attitude and possibly invest in it after its IPO.
Beware of IPO Risks
One of the downsides of investing in an IPO as an individual is that you probably won’t be able to buy shares at the initial offering price. When you go through a broker, you will be buying IPO shares after trading has begun. This means you could be paying an inflated price for the stock and that you are at risk of losing money when the price falls. Some companies get around this with a direct public offering that allows individual investors to buy shares before trading begins.
Catie Watson spent three decades in the corporate world before becoming a freelance writer. She has an English degree from UC Berkeley and specializes in topics related to personal finance, careers and business.