Investing in IPO’s

by Scott Sery on August 7, 2012

An initial public offering, or IPO, occurs when a previously privately held company decides to sell stock.  IPO’s actually happen many times per week with different companies going public and becoming traded on one of the stock exchanges.  Most people do not hear about them unless a big company makes a big deal about their IPO.  Such was the case with Facebook (FB).  The idea of buying into a company that previously was unavailable is sexy.  The thought of striking it rich by getting in at the ground level is sure to lure a lot of people in.  For those who do not do their due diligence, the dollar signs in their eyes can fade quickly.

Before even thinking about investing in IPO’s you need to check with your broker if they allow it.  Most IPO’s are not actually offered to the public, but rather large brokerage firms will buy up thousands of shares, and then market them to their investors.  If you happen to have an account at a smaller brokerage firm, you might not have access to the stock when it first becomes available.

Assuming you can get in on the ground level, you will need to check the New York Stock Exchange or NASDAQ to determine the upcoming IPO’s.  Finding a big name company should not be hard; they will issue hundreds of press releases in order to drum up more interest.  For other companies, make sure to research them thoroughly.  Do as much research as possible beforehand to make sure they are profitable.  Lastly, mark your calendar so you can call your broker when the date of the IPO comes around.

There are a lot of brokerage firms that allow you to place trades online.  Sometimes, with new offerings, you will actually have to call the brokerage firm in order to make the trade.  Before you do so, make sure you have enough money in your account to provide adequate leverage; buying 1 share may not be worthwhile after taking out commissions.  In order to reduce the emotional buying/selling urge you should set a sell price.  Know how much you want, and set the stock to sell as soon as the price hits your goal.  The key to making money in the market is to never look back, if the stock keeps going up, be happy with the profit you made.  If it plummets, be happy you got out before losing too much.

Emotions drive a good portion of the investment activity among individuals.  Investing in IPO’s is exciting; it panders to the emotional aspect of the investment.  The novelty of getting in when the stock is low and knowing you were one of the first investors is not the best way to make money.  There are too many stories of people who lost their entire investment because they got in on a poorly run company with a slick marketing campaign.  Instead, if you are investing for the sport of it, use only that which you can afford to lose.  Don’t plan to get rich quick and don’t invest your life savings on “the next big thing.”  Rather, prepare yourself for a bumpy ride, do plenty of research, and make sure you know when to get out.  IPO’s are a fun game, but without a lot of research done beforehand you are taking a lot of unnecessary risk.

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Scott Sery

Scott Sery is a native to Billings, Montana. Within an hour in nearly any direction he can be found fishing, hunting, backpacking, caving, and rock or ice climbing. With an extensive knowledge of the finance and insurance world, Scott loves to write personal finance articles. When not talking money, he enjoys passing on his knowledge of the back country, or how to live sustainably. You can learn more about Scott on his website Sery Content Development
  • I’ve never invested in an IPO. It kind of makes me uneasy, since it’s something totally new. You don’t really have any idea how the markets will react to a new IPO. And actually, the only time I’ve really paid attention to one was when Facebook had theirs.

    • Yeah I don’t think I would ever try and get into an IPO. Most will run up and pull back to a point where its a good buying opportunity if the stock is worth the investment to begin with.

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