Market Information

Market Information

How To Buy Into An IPO

Thursday, November 15, 2018

One of the basic tenets of investing in stocks is buying low and selling high. With this in mind, an IPO (initial product offering) seems like the perfect investment opportunity for anyone. When a major company puts an IPO out there, there’s always a lot of buzz and interest, and this is generally because it’s seen as a chance for investors of all stripes to get in on the ground floor of something that will pay off a great deal later on.  However, does this really work out in practice? Here’s the approach you should take for buying into an IPO.

Are IPOs A Good Match For Me?

To be clear, there’s no shortage of IPOs for you to take a look at. Statistics show that China has the fastest-growing numbers in terms of IPOs, but that the United States is still on top overall. One thing that’s important to understand is that just because you are taking part in an IPO that has a lot of media hype doesn’t mean that you’re guaranteed to have a solid investment. For one historical example, let’s go back to 2011 and what happened with Groupon. Groupon was the subject of a lot of excitement, but after pricing its shares at $20 initially, it rarely moved above that price.

What went wrong here?  The investor hype led to underwriters pricing the IPO’s shares above what they would normally do based on Groupon’s own merits. Things wouldn’t balance out until years later. As a result of issues like these, investors need to understand the risk of investing into an IPO. Like any securities, nothing is certain, as there’s not the historical data to suggest exactly what type of earnings and projections the company will have. Even if they are transparent, an IPO generally marks a massive shift for any company, so what holds true in that information may not be the case after you buy in.

Starting To Invest In An IPO

With this said, investing in an IPO isn’t a bad thing every time, and some people have become very successful by doing so. For some people, with established portfolios and comfortable financial positions, it may make sense to a certain portion of your investment funds into ventures like these. For those who don’t have that opportunity, but are still debating, it may make sense to ask some key questions first.

One such question is what about this particular business is going to keep it going strong in the long term, rather than being eclipsed by another firm in the near future. Examples of these can include key executives, patents, or trademarks. You should also ask how comfortable you would feel if the IPO stock had a steep drop, but you still felt comfortable in the long-term potential of the business. Would you be willing to hang on, or would you potentially sell as an emotional response? For example, even stocks that may seem like sure bets now, like Facebook or Alibaba, both experienced steep drops in value after their IPOs. Remember that patience pays when you are first starting out.

If you think that buying into an IPO is for you, you’re going to want to have tools and platforms that allow you to see what other qualified investors are looking at, not to mention potentially opening up new trading opportunities after you buy in. This is where companies like PrimaryMarkets come in, serving as a global independent marketplace that lets wholesale sophisticated investors take part in secondary trading of securities and investments. In addition, we also help unlisted companies and trusts to raise new capital.

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