Options as a Strategic Investment

It is really very seductive and alluring to buy an IPO (Initial Public Offering) at its offering price. Everyone thinks of riding the stocks and flipping it to make some good amount of cash. Everyone thinks he could find the next Microsoft and so be set for his whole life. But guys wake up… come out of the fantasy world. Public offerings are a way for companies to raise capitals for new processes, projects or operations and not a short cut ticket to become rich over night for the average investor.

An IPO i.e. Initial Public Offering is offered by a private company to the public. It is the first sale of stock. Generally offered by smaller, younger companies who need funds to establish themselves but at time there are established companies offering IPO’s for new processes or additional cash inputs. Companies usually take the help of investment banks to go public, which in turn “underwrites” the process. Which in reality is nothing is but the authority to investment banks to raise the capital from the public on behalf of the companies that are issuing the securities.

Than there are “Hot IPO’s” are the IPO’s which rises dramatically above the offered price on the very first day itself.  Seasoned investors buy them just to flip them for getting a much higher profit. Generally the stocks are not available at the offered prices to the average investor and if the average investor gets an stock offering than that is generally the one you don’t want. Whereas investing in a brand new stock always has some risk attached with it. You might get lucky and get some money by flipping but you can’t see a profit from it in the long run.

Experts and researchers say that IPO shares generally perform mush worse than shares of seasoned companies in the first three years and in fact have negative returns.  Some experts even say that one-third of the companies go down over 50% to their opening prices and only one-fifth of the companies had really doubled their offering price. This data was achieved from the companies who became public from 1989 to 2000.

We could never ignore the fact that people have made money from IPO’s, for example remember Google. But for starters you should try to get the shares early and as close to the original offering price as possible. It is going to be much better if you have ties with the underwriter, as that could win you allocations. Then sell it early I.e. just before the decline of shares start. As for every winner, there must be some losers who buy the shares at the wrong time.

Finally opportunities do exist in here but it should never be considered as easy money. To be successful in IPO investment you must have a giant degree of skepticism, some strategic planning, a bit of far sightedness and should never be thought of as a short-cut to riches. So go have happy IPO investing period guys.