With the big news coverage surrounding the IPOs of Twitter and Facebook in the past couple of years, you have probably already heard about overnight millionaires of the Silicon Valley, and startups becoming billion dollar businesses in an incredibly short period of times. Can you benefit from an IPO as well? Probably, with a little due diligence and information from the markets. But first, let’s see what an IPO is and how you can get in.
What is an IPO?
IPO stands for Initial Public Offering, and marks the first time the share of a company are sold to the general public on the stock market. Past IPOs have included companies such as General Motors, Visa Inc and Zoopla in the past couple of years. While it usually means a big check for the early investors and employees hired before the IPO, it could also be your chance to make a little money by trading those IPO stocks on the short term. It is important that you do your homework before you invest in any stock, and the same goes for IPOs. To help you determine the estimated launch price of a stock, there are available studies prior to the release, and you can also get information about the grey markets.
What are grey markets?
Grey markets reflect trader speculation on the value of the IPO at the end of a first day of trading. IG the leading financial spreadbetting provider, has a list of past and upcoming IPOs that you can consult to check the estimated launch price, and the actual one. Since the traders’ sentiment is very important as part of the actual market performance of the stock, grey markets can help you make a decision about investing in the next IPO or not.
Making money from day trading
Trading daily, or taking short term positions, is pretty time consuming. Around here at Reach Financial Independence we have talked about day trading a bit, on market such as foreign exchange or individual stock markets, but generally we lean more towards mid to long term trading as a way to build wealth safely. While day trading can offer big returns, it can offer similar losses if you go into the market not fully aware of what you are doing. This is why such literature and reports are really important to be as informed as possible before making a decision to invest. Which doesn’t mean IPOs will be more predictable. While most of them ended up pretty close to their estimate, a couple of estimates were off by 25%. For the novice investor, index funds, and a few individual picks of dividend stocks or long lasting companies may be a safer option to invest your money.
I wish I had the time to invest in IPO’s. It seems like it’d be a lot of fun, but also a good way to part with my money. Investing outside of index funds always feels like an all or nothing thing. Either I have to focus all (or most) of my time on it, or I just shouldn’t bother (because I’ll probably be wasting my money).
I think it’s important to do your research when investing in IPOs and choose wisely. Not every IPO will be a success and there’s a risk of losing money but there’s also a chance of missing out on profits by waiting for prices to stabilise. I’ve invested in IPOs in the past and have made a profit. It’s important to understand the risk, the company you’re investing in, and the industry before investing.