The media chatter seems to be full of information about Facebook and Groupon’s initial public offering (IPO) of stock. Many people wonder if IPOs make good investments.
It is very difficult to determine the value of a stock that has been around a while, let alone a new one with little information to go on. Sometimes the initial public offering price is good, because it may be priced low such that if the underwriter has to buy unsold shares. However often most shares of the IPO are pre-sold to institutional investors or other qualified buyers. If the general public wants to buy the shares, they may be buying them after the market may have driven the cost up. For example LinkedIn went public last year with an initial price of $45, but sold $83 the same day. So if you bought it, you may be buying it at the higher cost. This is not to say and IPO may continue to appreciate, however most advisors think that investing in IPOs can be aggressive. If someone fits the model of a long-term investor, using mutual fund type accounts for professional security picking and diversification, then buying individual stocks isn’t really a fit for them, unless only done so with a small percentage of their portfolio.
Talk to your investment advisor about opportunities and risk of investing in IPOs and other alternatives: you might not want to miss an opportunity to get a nice little profit, however be careful to do so only if it really fits your overall goals, risk level and investment style.