When IPOs Hit What Should You Consider?

It can be tempting to get caught up in an initial public offering of a hot company. While you’re deciding whether an IPO fits into your portfolio, here are a few things you may want to keep in mind.

  • Who Can Buy an IPO? IPO shares initially are sold to specified groups of investors – typically large institutions or brokerages – at an offer price. Then those shares typically are made available to selected clients before they’re ever offered to the general public. Within a few days, shares can be traded on stock exchanges by the general public. In other words, the vast majority of investors will never be able to buy an IPO at the offer price.
  • Price Matters. In general, the opening price for public trading is higher than the IPO offer price. So if you invest at the opening price (or enter a market order), you will likely see a higher price than the IPO was priced.
  • Timing is Everything. New IPOs often hit the market when demand for stocks in a specific industry or sector are strong. When this happens, it’s important to realize you’re buying in a seller’s market and not a buyer’s market, which means you’re more likely to pay a premium for the shares. If the new company fails to live up to the growth expectations built into the share price, you may suffer a loss.
  • Research First. IPOs often 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.

If you’re looking for a one-stop research destination prior to the offering, you may want to review the company’s Securities and Exchange Commission (SEC) filings. While SEC filings can be lengthy and, in some cases, difficult to understand, companies are required to include a section on “Risk Factors” in S-1/A filings. The Risk Factors section is typically straightforward by intention so that investors understand what they’re getting into.

You might also want to email a company’s Investor Relations department with a specific question or to ask for more detailed information. Prior to issuing IPOs, most companies make sure to have someone available to answer investor questions and address concerns, however, during the offering process, only information provided in the prospectus is available for review or discussion.

Finally, keep up to date on the most recent news and market sentiment. With IPOs, you’ll be able to find a lot of different news stories that have dissected the company’s SEC filing and highlighted specific details. While current news isn’t a substitute for reading the SEC filing yourself, it can provide some good insight into the company and how other investors may be feeling about the upcoming IPO.

Question: What factors do you consider when evaluating an IPO?

Next Step: Scottrade® clients can find information about a company that has issued new shares the day after the IPO by logging in and going to the Quotes & Research section. ScottradeELITE® users can see a detailed summary of historical and upcoming IPOs. If you’re not a Scottrade® client you can use our free Quotes & Research stock section.

The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

Before investing in an initial public offering, be sure that you are fully aware of the risks involved with this type of investing. There are a variety of risk factors typically associated with investing in new issue securities, any one of which may have a material and adverse effect on the price of the issuer’s common stock. IPOs may not be appropriate for every investor. Customers 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.

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