IPOs are becoming very hot right now, with hundreds of startups taking to the stock market in order to raise more capital. But what is an IPO? And should you invest in IPOs?
An IPO is an Initial Public Offering, this is the stock market launch of a given company. This is where the stock is first put on sale to the greater public and institutional investors.
Is investing in IPOs a good idea?
As a general rule, IPOs aren’t the best time to invest in a given company. Often, on a company’s IPO is overvalued, due to the hype surrounding the company on the day of its IPO.
I personally subscribe to the Rule One investment strategy, whenever I invest in anything.
This strategy states that you should aim to get the best companies, at the best possible prices. This is something that doesn’t tend to happen with IPOs, as they have so much publicity and hype around them, that their prices aren’t reflective of their true value.
Even Warren Buffett doesn’t buy IPOs. In an interview with CNBC, Warren Buffett told the world:
I have never bought an IPO, although I was once given some Ford shares when it had its IPO. I don’t like that you are trying to put you money in it [in the IPO] and everyone is trying to push you to buy it.
I don’t think in 54 years, Berkshire has ever bough a new issue.
Warren Buffett’s friend and Berkshire executive, Charlie Munger was also quoted as saying “I have never bought a new issue.”
Personally, I too have never bought a new issue. This is mainly due to my largest fear when it comes to investing in IPOs: the drop.
When companies have too much hype around them, and their IPO, they suffer from something I call “The Drop!” This sees the following things:
- A small initial share price, usually under $30.
- A massive hike in the price on the first day as a result of all the hype.
- A massive decrease in price, usually going below what it was worth at IPO opening.
- A struggle to recover for the next several weeks.
This has happened with many IPOs, such as LYFT, Uber, and LG, due to the excess hype surrounding their IPOs.
But the main problem surrounding IPOs is: You won’t be able to get in on day 1. If you are looking to have some get rich quick, investing genius, you’ll have to be pretty well connected in order to do so.
Whilst there are thousands of stories of people who bought a couple of thousand dollars worth of stock at the IPO, and began multimillionaires overnight. These cases are few and far between.
As a general rule, unless you are known in the industry, or have a long time partnership with a firm that deals in investing in IPOs, you probably won’t get to invest at the opening price.
This means that any dreams of making yourself as a millionaire from only a couple thousand dollars of investment, you are out of luck.
What is the best course of action to invest in IPOs?
The best course of action to invest in IPOs is simply to wait. Usually, after the hype dies down, the stock price goes crashing. If you are confident, and your research backs you up, buy into the stock then.
Take Facebook for example, now, it is a solid stock and is pretty stable (at the moment). But when it had its IPO in 2012, it had a classic “Hype and Drop.”
The stock was priced at $38 per share, on the first day of its IPO, the stock took a massive dive. This is when the smarter investors got in and bought several hundred thousand dollars’ worth of stock.
This investment turned many of them into multimultimillionaires, and some into billionaires.
When these investors invested, the stock was valuated at $20, it is now valuated at over $200 at the time of writing.
And Facebook is not a cherry-picked example, the same also happened with Google and Amazon too.
I want to invest in IPOs anyway- How do I do that?
Some of you may be thinking “I have enough research done, and I know Company X is going to increase dramatically in value. I’m going to invest in IPOs and I am going to be a multimillionaire!”
First of all, good luck (I genuinely mean that). Secondly, when you invest in IPOs, you would have to invest in them through a firm that is solely there to invest in IPOs.
There are many of these such companies scattered throughout the internet like this one (we are not affiliated, I just found them and chose to link to them).
If you didn’t have an IPO-investing company, you would buy them like any normal stock, through your broker or investment app. However, this would be several days after the IPO, once it had become a standard public company. This would likely be after all the hype had died down for the IPO.
Do you think you will ever invest in IPOs? Have you ever invested in IPOs? Is it something you’ve ever thought of? Is there anything you thought I missed off to invest in IPOs?
