IPO's, or initial public offerings can be a hot topic issue in the financial advisory / investment services industry. On one hand some of the biggest gainers in history have come from IPO's. On the other hand, many have suffered dramatically, some even disappearing all together. So, how does one know if investing in IPO's is a good fit for them or it is too risky? Today we will take a closer look at why IPO investing shouldn't be something you take lightly.
1 - Limited history: Many IPO's these days are young (less than 10 years old) companies and have very limited, or non-existent sales. Some are not even profitable believe it or not. For the long term, disciplined investor this leaves very little analysis for them to ponder.
Many of these companies are going public to put the proceeds all on one product, or one direction for the company. Biotech IPO's for instance tend to go public when their drugs are in the early stages of FDA approval and investors are pinning their hopes on those drugs making it to the public. When the drugs don't get FDA approval the stock prices tend to take severe hits.
2- Unknown market acceptance: Its quite easy to see that the market has accepted Facebook
3 - IPO pricing: Even if you are the most astute analyst, and do all your research, you still have no idea how the market will respond to the initial pricing that the company has set. Are they priced too high for the current conditions or is it priced at a discount? If its priced at a discount, why?
Now, in the short term these issues can wreak havoc on an investors account, but if you have a long term view in mind, and keep your position sizes small there is no reason that you couldn't take a shot on IPO's that grab your attention.