Initial public offerings (IPO), the first time that the stock of a private company was sold to the public, got a little crazy in the dot-com mania days of the 1990s. Back then, investors could throw money into just about any IPO and be guaranteed killer returns—at least at first. People who had the foresight to get in and out of these companies made investing look easy. Unfortunately, many newly public companies such as VA Linux and theGlobe.com experienced huge first-day gains but then ended up disappointing investors in the long run trading.
Dig Deep for Objective Research
Getting information on companies set to go public is demanding. Unlike most publicly traded companies, private companies do not usually have swarms of analysts covering them, attempting to uncover possible cracks in their corporate armor. Remember that although most companies try to disclose all information in their prospectus fully, it is still written by them and not by an unbiased third party.
Pick a Company With Strong Brokers
Try to select a company that has a strong underwriter. We’re not saying that the big investment banks never bring duds public, but, in general, quality brokerages are more likely to be associated with quality. It’s important to exercise extra caution when selecting smaller brokerages because they may be willing to underwrite any company. For example, based on its reputation, Goldman Sachs (GS) can afford to be a lot pickier about the companies it underwrites than a much smaller, relatively unknown underwriter can use Trading.
Always Read the Prospectus
We’ve mentioned not to put all your faith in a prospectus, but you should never skip perusing it. It may be a dry read, but the prospectus, which can be requested from the broker responsible for bringing the company public, lays out the subject’s risks and opportunities, along with the proposed uses for the money raised by the IPO. For example, if the money is being deployed to repay loans or buy the equity from founders or private investors, it may be worth giving the IPO a miss the Trading.
Skepticism is a positive attribute to cultivate in the IPO market. As we mentioned earlier, there is always a lot of uncertainty surrounding IPOs, mainly because of a lack of available information. Consequently, it would help if you always approached them with caution. That’s particularly the case if your broker recommends an IPO. When this happens, it tends to indicate that most institutions and money managers have graciously passed on the underwriter’s attempts to sell the stock to them.
Successful companies regularly go public, yet sifting through the rabble and finding those with the most potential is no easy task. That isn’t to say that all IPOs should be avoided, though. Some investors who bought the stock at the IPO price have been rewarded handsomely by the companies in question meant for trading. So make sure you try the four tips on IPO trading. Good Luck!