It seems like everyone is doing it these days: Robinhood. Airbnb. DoorDash. Even video game company Roblox is going public with an initial public offering. An IPO is when a private company lists its first shares of stock publicly on a stock exchange (like the NASDAQ). The public then has access to buy and sell the stock themselves.
Companies launch IPOs to quickly raise cash from the public, and new investors have the chance to make money on a potentially valuable, growing stock. But like with any investment, IPOs come with risk. Is it smart to invest in one?
We asked four experts if it’s a good investment to purchase an IPO. Most said no, though it may depend on the company.
Should you buy an IPO?
“With an IPO, there are always insiders who want to sell. Because of this, IPO stocks often drop later. Only the hottest ones take off and never drop below the IPO price. So my general rule is to wait until the market properly prices the stock and then decide if investing in this company is a good idea.”
— David Haas, certified financial planner at Cereus Financial Advisors
“If it’s an IPO for a widely popular company like Uber or Lyft. This popularity causes people to buy into the hype, which in turn, may lift the stock price for no other reason than the hype itself. Excitement and popularity are often bad for good investment returns. It’s usually the unknown or the boring investments that provide the best returns over time. IPOs are basically the shiny new toy on Wall Street. They garner a lot of attention, everyone talks about them and speculators may drive up the stock price, but after a little time, they generally lose their luster and typically underperform the market.”
— Tim Doehrmann, certified financial planner at Eagle Ridge Wealth Advisors
“The IPO market has changed greatly in the last 20 years. Companies used to go public via IPO earlier in the process, with much lower valuations. This left lots of ‘meat’ on the bone for individual investors post IPO, but that landscape has changed. Today, many companies stay private for up to 10 years and go public with valuations around 10 billion. That has been extremely profitable to the private investors, but has hurt the returns of public investors that got in via IPO. So investing in an IPO today could be a good thing, but it could just be that you are providing the cash-out liquidity for the private investors along the way. Valuations matter and if possible find access to private markets to increase your chance of success.”
— Matt Chancey, certified financial planner at Chancey Wealth Management
“Most IPOs are almost always traps. Most of the time, most people should not buy IPOs. But, all legitimate investments are appropriate for the right investor under the right circumstances. The question is; ‘is this the proper investment for this investor?’”
— Karl Hicks, certified financial planner at The Leonard Financial Group
Want to learn more? We explain why you should avoid individual stocks like IPOs here.
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