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|The-Adviser.com The place to come for answers|
|When should I buy stock via an IPO?
By The-Adviser.com -
|New York - Most
initial public stock offerings ("IPOs") are high risk. Initially, the amount of
stock available for purchase is generally limited and, if it is a high profile IPO, you
will not be able to purchase an initial substantial amount. Most investors, including
institutional investors buy stock in what is referred to as the "aftermarket."
IPOs should generally be evaluated by comparing the stock of the new company to publicly traded competitors. For example, a food company's valuation would be compared to other food companies that are publicly traded. An underwriter would decide what attributes the new company has or does not have as compared to the existing competitor. Underwriters then determine an expected growth rate and discount the risk and prices the stock accordingly. This same approach should be used by individual investors.
You should also consider the background and incentives of the people involved. Is management selling all their shares or are they retaining a significant portion? Are the underwriters and accountants associated with the prospectus - blue chip and well established or are they from firms you never heard of. All these factors are important.
A decision to buy an IPO should be based on your willingness to assume the risk that future growth or future management plans will not occur and if you believe the underwriter has undervalued the potential of the company. Consider the special factors affecting the below type of IPOs:
A wait and see strategy provides the best risk-reward potential. Most individuals have an overwhelming urgency to buy-in early. This usually sends the stock price up quickly. Speculation is usually the worst possible strategy. Generally, it is better to wait four to six months, or even a year, to see how these young companies perform and handle the pressures of being a public company. Some companies go public prematurely and initially the stock goes down for several years. However, as time goes by and products are proven, the company obtains respect from Wall Street and like fine wine - they get better with age.
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A wait and see strategy provides the best risk reward potential.
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