IPOs – otherwise known in long form as initial public offerings – have really hit the headlines in recent times. The ill fated Facebook launch is well known by many, along with the far more successful Twitter IPO of recent times. We’ve all heard stories of people getting in on these IPOs and sinking some cash into them when they go live. But is it really advisable to do this and are there really big profits to be made?
Rule #1: IPOs are not necessarily ‘hot’
Lots of people assume big profits can always be made from IPOs. Recently in the UK the Royal Mail launched its IPO, which saw the value of the business rise markedly in the first few days (hours, even) after its launch. This made huge profits for those lucky enough to have gotten a piece of this early action.
But for every story of this type there is a Facebook – an IPO that sees the launch price sink to lows that were previously only the stuff of nightmares. The rule here is to remember that initial public offerings tend to have quite a buzz around them, especially when the company or business in question is well known. Don’t assume the buzz is worthwhile and guarantees you a profit.
Rule #2: an IPO doesn’t always guarantee a strong financial footing
You’d be forgiven for thinking a company launching an IPO is in a great position financially. However this isn’t always the case. In fact there have been many examples (some quite well known, such as Pets.com for example) of businesses that failed after their IPO. Unfortunately some businesses seem to think an IPO will get them out of trouble, without thinking that the price can easily go down as well as up.
Rule #3: always do your research
If you are intent on getting involved in this type of investment, always always ALWAYS do your homework first. Don’t believe the headlines and the hype. You might do this and get lucky, getting in early and getting out with a good price for your investment, but you are much more likely not to be that lucky.
You can minimize the risk of losing money on this type of investment by looking into the information given in the prospectus, as well as doing your own research on the company. The more experience you have in this area the better, but we all have to start somewhere.
Of course, initial public offerings are always dicey affairs. You could be about to make the best investment of your life, or it might be the worst thing you ever do financially. You just never know. The main thing to remember is that you shouldn’t believe all the hype, because there tends to be a lot of it about. 2014 might be the year you make a fortune on a well chosen IPO. Similarly it could be the year you steer clear because you know they aren’t for you.