4. Be cautious
Skepticism is a positive attribute to cultivate in the IPO market. As we mentioned earlier, there is always plenty of uncertainty surrounding IPOs, mainly because of the lack of available information. You should always approach an IPO with caution.
If your broker recommends an IPO, you should exercise even more skepticism. This is a clear indication that most institutions and money managers have passed on the underwriter's attempts to sell them stock. In this situation, individual investors are likely getting the leftovers that the "big money" didn't want.
If your broker is strongly pitching shares, there is probably a reason behind the high number of these available stocks. This brings up an important point: Even if you find a company going public that you deem to be a worthwhile investment, it's possible you won't be able to get shares. Brokers have a habit of saving their IPO allocations for favored clients, so unless you are a high roller, chances are good that you won't be able to get in.
5. Consider waiting for the lock-up period to end
The lock-up period is a legally binding contract (of three to 24 months) between the underwriters and company insiders prohibiting large shareholders from selling the stock for a specified period. Take, for example, Jim Cramer, the founder of TheStreet (TST) and a contributor to MSN Money's Top Stocks blog. At the height of TheStreet's stock price, the paper worth of Cramer's shares was in the dozens of millions of dollars. But Cramer knew the stock was overpriced and would soon come down to earth, along with his personal wealth. Because this happened during the lock-up period, even if Cramer had wanted to sell, he was legally forbidden to do so. When lock-ups expire, the previously restricted parties are permitted to sell their stock.
The point here is that waiting until insiders are free to sell their shares is not a bad strategy, because if they continue to hold the stock once the lock-up period has expired, it may be an indication that the company has a bright and sustainable future. During the lock-up period, there is no way to tell whether insiders would be happy to take the spot price of the stock.
Let the market take its course before you take the plunge. A good company is still going to be a good company, and a worthy investment, even after the lock-up period expires.
The bottom line
By no means are we suggesting that all IPOs should be avoided; some investors who have bought stocks at the IPO prices have been rewarded handsomely. Every month, successful companies go public, but it is difficult to sift through the riffraff to find the investments with the most potential. Keep in mind that when it comes to dealing with the IPO market, a skeptical and informed investor is likely to perform much better than one who is not.
More from Investopedia:
VIDEO ON MSN MONEY
2. Don't invest, save your money for gasoline!
3. Don't invest, save your money for gasoline!
4. Don't invest, save your money for gasoline!
5. Don't invest, save your money for gasoline!
CAUSE YOU ARE GONNA NEED IT, mark these words!
JUST DO NOT UNDERSTAND WHY THE WHOLE COUNTRY IS NOT DOING ANYTHING ABOUT OUR DO NOTHING CONGRESS?
WE NEED TERM LIMITS NOT A RETIRMENT CENTER IN CONGRESS. THE WAY THE SYSTEM IS OPERATING ITS ALL A MATTER OF MONEY AND THATS NOT GETTING THE JOB DONE. I DO NOT BELIEVE CONGRESS WAS ESTABLISHED JUST FOR PERKS TO SET THEMSELVES UP FOR LIFE. THEY ARE RECEIVING MORE FREEBIES THAN THE ILLEGALS. WHATS THE MATTER WITH OUR COUNTRY? WE NEED CHANGE NOW AND NOT TOMORROW. WE MUST VOTE OUT THE CURRENT ADMINISTRATION EVEN IF YOU DO NOT LIKE THE INCOMING AGENDA, SOME THINGS JUST HAS TO GIVE. LEGAL AMERICANS ARE SUFFERING EVEN US SERVICE MEMBERS WHO GAVE THIRTY YEARS TO THEIR COUNTRY AND FOUGHT THROUGH THREE WARS. I AM ALMOST ASHAMED TO ADMIT IT WAS ALL IN VAIN. I ALSO BELIEVE MOST OF OUR CURRENT MILITARY PERSONEL ARE SERVING ONLY BECAUSE THERE ARE NO OTHER JOBS AVAILABLE. WHEN A MOTHER OF TWO CHILDREN LEAVES HER HOME TO SERVE OVERSEAS IN THE MILITARY WHAT DOES THAT TELL YOU??? GOD HELP US ALL.....
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] S&P futures vs fair value: +1.90. Nasdaq futures vs fair value: +6.70. The S&P 500 futures trade two points above fair value.
Markets in Asia ended on a mixed note, but indices in China and Japan rallied. Tradable news and data were absent from the calendar.
- Japan's Nikkei rallied 0.5% to its best close in more than six months. Casino-related names outperformed as Japan Cash Machine and Universal Entertainment Corp. gained 5.3% ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'