IPO stocks are a hot market right now. As a group, they’re outpacing the broader market 2-to-1. There is potential for a big payout, but there can be risks associated with these kinds of investments. To protect your assets, you need to do your research before deciding which IPO to invest in.
Despite hopes and dreams, most people never have the opportunity to buy a true IPO (initial public offering) because nearly all the shares go to company insiders, brokerage firms and the brokers’ biggest clients. For practical purposes, the IPO stocks we’re talking about are the shares of a company after it starts trading to the public.
Profitability
Before jumping on a popular IPO, you want to analyze the potential for future profitability. That doesn’t mean there needs to be large profit margins right now. Companies that are continually putting money back into their growing businesses will go some years without profit. However, this is usually a calculated decision that is made because of the potential for larger profit down the road. Before investing, make sure there is a sustainable business model in place.
Timing
Timing is everything when it comes to IPOs. Once you find an IPO worth investing in, the next step is to consider whether the timing is right now, or if it would be more beneficial to wait. Just by waiting a day, a week or a month following an IPO, you can notice what kind of growth prospects may lie ahead.
The Opening Price
An IPO’s opening price on its first day of trading in an important aspect of the investment. Banks try to find a middle ground between the company holding the IPO (wanting a high price) and the investors (wanting a lower price). Sometimes they find the perfect balance, and sometimes they miss by a mile.
Stocks can swing early on based on factors like media hype, opening price, the number of shares available, etc.
On sites like Nasdaq, NYSE and NerdWallet, you can find a list of upcoming IPOs. If there’s a stock you’d like to invest in, be sure to mark your calendar when the pricing details and IPO date are finalized. Be aware that the price you pay for an IPO could differ drastically from the initial offering price.