By Sandra MacGregor
E-commerce giant Alibaba created so much buzz when it went public last year that even people who didn't know their Dow from their Nasdaq were scrambling to get a piece of the action. Now Airbnb, Uber and Pinterest are rumored to be planning initial public offerings (IPOs) this year, setting the stage for another wave of hype and interest from too many hasty investors.
Successful IPO investing takes experience, care and long-term planning. Here are five tips from Richard Messina, the head of investment product management at E*TRADE Securities, on how to make the most of an IPO.
1. Know Yourself
Are you genuinely interested in the company? Have you been following its evolution over time? Is the company part of a sector you're passionate about? If you answer "yes" to these questions, you are more likely to put in the time needed to invest wisely, improving your chances of turning a profit, says Messina.
If you have little familiarity with the sector or the company and are just hoping to buy the stocks and sell them quickly in the hopes of making a quick buck, then be sure you're taking a realistic approach. Research the IPO thoroughly and know how much you can safely risk investing.
"Assessing why you're attracted to an IPO, and deciding if you're in it for the long term or the short, will help guide your behavior," says Messina.
IPOs come with significant risks and the outcome is always uncertain. Messina stresses the importance of discipline and taking a frank look at how much risk you can tolerate. Never invest more in an IPO than you can afford to lose. It's important to stick to that amount and avoid getting caught up in the excitement, which can cloud your thinking. “Going for all or nothing is when you are going to end up on the bad side of a trade," says Messina.
3. Separate The Hype From The Hard Facts
When an IPO is getting a lot of hype in the media, it can be difficult to separate fact from fiction. One of the best sources for objective information is the Securities and Exchange Commission website. When releasing an IPO, companies have to file a variety of forms with the commission, making it the best place to acquire a thorough understanding of a company.
Many potentially profitable IPOs don't get a lot of play in the media. This is another compelling reason to ignore the hype and do your own research, Messina says.
4. Bigger Isn't Necessarily Better
Some people will only invest in an IPO if it's backed by one of the major brokers. But Messina warns that placing too much weight on an IPO backer's size or pedigree may lead to missed opportunities. In some sectors, boutique brokerages may lead the deal because they have specialized knowledge and experience in that field. Furthermore, size should not matter because, depending on the deal, most of the major brokerage houses are often involved on some level even if they are not the biggest backer.
5. Follow Up With A Follow-On
If you had your eye on an IPO but missed out, don't despair. You may get a second chance. “What a lot of people don't realize is that many companies raise capital again with a follow-on public offering," or FPO, says Messina. In an FPO, a company that has already been through an IPO issues supplementary shares of a stock. It's not uncommon for a company to go back into the equity market to raise more capital. Furthermore, FPO share prices are market-driven and might cost less than IPO shares, whose prices are not.
Follow these five rules and do as much research as possible, and you'll be in strong position to decide if and how to invest in an IPO.
Sandra MacGregor is a former magazine editor and an internationally published writer. She writes on a variety of subjects including finance, lifestyle and travel. Her work has appeared in the New York Times, the Boston Globe, Washington Post, the UK Telegraph and the Toronto Star.
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