An initial public offering (IPO) is the first time a company sells stock to the public. An IPO typically represents a small fast-growing company looking to raise capital to grow and expand. Investing in IPOs can be lucrative because every big market winner such as Apple, Bidu or Google was once an IPO, but it is also risky because many IPOs fail. IPO stock can have wild and unpredictable moves, especially in the first days and months of trading. IPO investing requires skill and tolerance for risk, and is different in several respects from investing in established stocks.
1. Follow an IPO site to select an upcoming IPO that interests you. Some IPO sites feature investor chats that help measure investor interest in upcoming IPOs, and provide a wealth of useful pre-IPO information such as registration filing updates, a company synopsis and website and IPO size and pricing.
2. Decide how much money you are willing to put in an IPO.
3. Observe how a stock opens for trading and compare its market price to where the IPO was priced when it was released (subscription price). An IPO’s opening above its subscription price is a bullish sign; opening below is a bearish sign.
4. Wait to place your buy order until the initial excitement subsides and the initial price range and trend are established. Buy as soon as the stock has surpassed the initial high made in the first hours of trading.
5. Calculate how many shares to buy based on the current market price and the amount you allocated for the IPO.
6. Place a limit buy order with a limit price above the current market price. Many brokers accept only limit orders for IPO shares. Setting the limit above the current market price will enable you to buy right away at the current market price while protecting yourself from overpaying if there is a sudden spike in price.
7. Set a stop limit sell order just below the first day’s low. If your broker does not accept stop loss orders for IPOs, have a mental one and sell as soon as the stock price declines to that level.
- Use partial buys to build your position. You can buy some shares early on to “get in the game” and add more over the next few hours or days if you like what you see.
- Consider buying an IPO six to nine months after it goes public. Many IPOs form a base over that period and their stock price moves become more orderly and predictable.
- Do not place a pre-market order before an IPO opens for trading because you don’t know how high or how low it may open: you might overpay for the shares or buy a lemon that nobody wants.
- Act fast. Hot IPO stocks can move fast in either direction and hesitation can cost you in lost profits or sudden steep losses.
- “PassTrak Series 7: General Securities Representative License Exam”; Dearborn Financial Services; 2003
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