Initial public offerings, known as IPOs, tend to attract a lot of investor interest – especially when the company is well-known. However, that excitement isn’t always matched by investment returns.
Senior Analyst Josh Olson offers some tips to consider before you decide to invest in an IPO:
- Don’t let the excitement surrounding an IPO cloud your judgment. Too often, there is little financial information about the companies themselves, and many are not profitable. This can translate into extremely volatile stock prices.
- While an IPO’s stock price tends to rise on the day it begins trading, investors who bought shares at the end of the first day haven’t always fared well. The stocks have often fallen below the closing first-day price after six months.
High volatility and a falling stock price are not generally a recipe for attractive investor returns. So what steps should you take if you’re still interested in an IPO?
- Understand that the opening price will likely be different from the official IPO price. New issues can experience extreme volatility in the first few hours and days of trading in the secondary market. When the company’s stock opens for secondary trading and becomes more widely available, the price can be significantly different from the IPO price set by the security underwriters. In addition, new issues often do not begin trading the moment the market opens.
- Use a limit order. This can help you avoid paying more for the stock than you intended. Once you understand the risks of purchasing a stock during its first public trading days, work with your financial advisor to determine the highest price you’re willing to pay for the stock, and then set that amount as your limit.
- Remember that an IPO must be priced before an order can be accepted. Edward Jones typically does not accept orders until after an IPO has been priced, which is usually the morning the new issue begins trading. In addition, your financial advisor is not permitted to accept market orders for any IPO prior to its trading in the secondary market.
Remember to always do your homework before deciding on any investment, including an IPO. This includes working with your financial advisor to determine whether the investment is suitable for your portfolio.