Do you know anybody who has tripled his or her money investing in the initial public offering (IPO) of a hotshot new company? It can happen.
Yet the truth is, most investors don’t make money playing IPOs. It’s just that people tend not to brag when they lose money. Nonetheless, investors of all kinds are lined up for a chance at the next IPO. So it pays to know the facts before diving in.
First bit of advice: Don’t bet the farm. The problem is that generally IPOs are issued by companies with no track record, inexperienced management, and few assets. And, unfortunately, the underwriters for these IPOs are motivated to complete the transaction, collect their fees, and move on. Their compensation is linked not to the quality of the firms they take public, but rather to the number of deals they sell to the public.
Protect yourself by doing your homework, as you would for any investment. A company planning an IPO writes a prospectus that describes the business, and details management’s plans for what they intend to do with the money, how fast they intend the company to grow, and what profits they expect. The prospectus also discusses the competition and markets, and most importantly, describes the risks of investing in the IPO.
Do the necessary research and be sure you understand the risks before you invest in an IPO.