By Jack N., Communications Analyst and Blog Contributorr
I’ll confess that I’ve never purchased an initial public offering (IPO) of a stock. I’ve never been one of those who were able to buy an IPO at the offer price, and I’ve never been part of the first-day frenzy when the initial shares are publicly traded on stock exchanges.
That’s not to say that you should or should not avoid such things. But your timing, trade execution and research have to be spot on.
Depending on how you count them, there were more IPOs launched in October than any other month this year. In general, that’s a good sign for the markets. I don’t want to overstate things though: IPO activity hasn’t been nearly as robust as it was in the 1990s, when anywhere from 20 to 45 IPOs were launched each month. These days, an average of 10 IPOs happen in a month. But 2012 is on track to have the most IPOs since 2007. And October saw 18 to 19 IPOs (again depending on how you count them).
In other words, you may start to hear more and more about IPOs. Unfortunately, I think too many people don’t have a clue what it means to invest in an IPO – much less whether they should invest at all in them. So let me offer a few insights.
IPOs initially are sold to specified groups of investors – typically large institutions or brokerages – at an offer price. Those shares typically are made available to selected clients. In other words, the vast majority of investors will never be able to buy an IPO at the offer price. Within a few days, shares can be traded on stock exchanges to the general public. In general, the opening price for public trading is usually higher than the IPO offer price.
For example, of the 108 IPO launches from Jan. 1 through Oct. 31, the average open price – the initial price where they can be purchased by the public – was 17.44 percent higher than the IPO offer price.
Like any stock, IPOs can lose money, whether you buy at the offer or open price. My primary point is to show that if you invest at the opening price, your return will likely be considerably lower than if you invest at the offer price.
Regardless of the price you really need to do your homework. IPOs oftentimes involve newer companies without a whole lot of history. Research is important before considering any investment opportunity; it’s even more critical when an IPO is involved.
Have you been able to buy an IPO at the offer price? If so, how did your investment work out?
Jack N. is a communications analyst at Scottrade. He works to demystify the markets and the economy for all types of investors and traders.
IPOs may not be appropriate for every investor. Clients should read the offering prospectus carefully, and make their own determination of whether an investment in the offering is consistent with their investment objectives, financial situation, and risk tolerance.
Articles, commentary, and opinions expressed on this site are those of the author and not necessarily those of Scottrade. Scottrade does not guarantee the accuracy of, or endorse, the views or opinions of the author.
The examples and/or strategies described in this blog are for informational purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.