What is IPO?
When a private company decides to raise capital by selling the share in the secondary market, the Initial Public Offering (IPO) is organized. Thus, IPO refers to the process of a new stock issuance by a private company.
IPO is generally used as a means of raising capital for the company for its growth and expansion. However, it can also be an exit strategy for the company owners or initial investors.
An IPO share can be released by private companies only if it fulfils the requirements set by the stock exchanges and Security and Exchange Commission (SEC).
The prices of the IPO stocks are set by the underwriters. These underwriters are chosen by the private company through their pre-marketing strategy.
One or more underwriters undertake the process of IPO which includes document preparation, filing, marketing, issuance and due diligence of the IPO stocks. Finally, the company issues the stocks on an IPO date.
How Long after IPO can you Buy Stocks?
The company along with their underwriters decides and publishes a date for IPO. On the IPO date, the shares of the company are released into the stock market. Hence, the public or interested investors can purchase the shares on or after the IPO date.
Investing in IPO stocks involves great risks. Hence, an investor should be aware when to trade in IPO stocks.
Moreover, you may wait till the end of the lock up period, to buy the shares of the initial investors. Thus, the time of investment prior to IPO is essential to fetch good returns from these stocks. Therefore, the article tells you when you should buy IPO stocks.
When should you not Buy IPO Stocks?
The price of IPO on Day 1 cannot be considered as a fair market price. In contrast, these price set by the underwriters are generally overpriced. Hence, you should not buy the stocks in the first few days after IPO.
However, you may find a lot of people doing this mistake. The possible reasons for buying the stocks on or just after the IPO date are as follows.
1. Underprice Myth:
Most people think that the IPO stock prices at the beginning are lower than its valuation.
Thus, they buy off these shares with the dream of turning into a billionaire in few years.
However, it is just a myth. In most of the IPOs, the initial price of the shares is overpriced.
The new investor prefers to follow the crowd and end up buying IPO stocks at the very initial stage. Hence, herd investment becomes one of the major reasons due to which a number of investors invest into shares on the IPO date.
3. Overhyped By Media:
You can consider it as a premarketing strategy of the company. The media plays its role by influencing a large crowd to invest into the shares as early as possible after the IPO.
When you should IPO Stocks?
When the IPO stocks are made public, the stocks are very volatile on the very first day. These stocks have no prior history and stock quotes. Thus, it is difficult to judge whether these stocks are fair market-priced or not.
1. Observe the performance
Instead of investing on IPO stocks on the very first day, you should wait for a few weeks. During this time, these stock forms a potential base.
After the potential base formation, you should observe the market related charts to understand the trends and growth or downfall of the company.
If the performance of the company seems to be growing, you may invest on the IPO stocks.
2. Strong Underwriters taking Charge of the IPO
You should learn about the company going public to judge whether the IPO stocks can be profitable or not. An IPO having strong underwriter can be a good option to invest in.
You should research about the reputation of the underwriters. After a profound analysis of the underwriter, you can invest into IPO stocks.
3. Wait until Lock-up Period Ends
You may wait till the lock up period ends and buy the stocks sold off by the initial investors.
It may be difficult to find an IPO with the potential to fetch maximum return until you learn every minute details about the company.
After the lock up period ends, the insiders of company can either sell off or hold their shares. It is a good strategy to buy the shares when the lock up period end.
4. Prospectus Indicate Growth:
Apart from deep research and observation, reading the prospectus of the company may help you understand the profitability of the IPO stocks.
The prospectus of the company contains the fundamentals, marketing and financial strategies of the company. These parameters provide an outline of their performance in the near future.
If the prospectus seems convincing, the investor may buy the IPO stocks.
It is advisable to refrain from buying IPO on the very first day and buy it only after detailed analysis.
The investor must observe the performance of the company for few weeks after IPO and then decide to bid for it.
You must be skeptical and informed investor when thinking about buying IPO stocks.
Stockquantum was founded by Dharmendra Mukati in 2018. I am a Trader and Investor in the last 10 years.
I am writing here about stock broker review, broker comparison, IPO investment, Crypto currencies, technical analysis, fundamental analysis, sub brokership, mutual fund, personal finance, and our experiences.