Stock investing for dummies – How to invest in IPOs

In this stock investing for dummies guide, we will talk about the IPOs. “Should I invest in IPOs?” is a very common question in the mind of many investors, especially the beginners in stock market. The IPOs used to be a big hit during the tech bubble days. You were almost guaranteed to make double or even triple digit profits by investing in IPOs of tech stocks which came out during those times. But post tech bubble burst, IPO market has come back to normal.

Stock market investors have come to terms with the reality that not all IPOs will give them huge returns. Therefore caution is required while investing your hard earned money in a new company which is going to be listed in the stock market exchange. Here are a few points which should be considered by stock investors while thinking of investing in stock IPOs.

1. Research the company – The difference between a company who is launching its IPO and an already public company is that t here is not much public information available about the new company freely available. Therefore, it is a must for the investors to research as much as possible about the company through various channels to understand the company background, the management and its policies, their products and their future plans. This way, the investors can find if the offer price is a fair value.

2. Brokers associated with IPO launch – It is always recommended that you go with IPOs which are handled by reputed underwriters and brokers. Though it is not 100% guaranteed that they will bring out a winner, the chances are good that they will do bring quality companies to the public. For example, you should choose an IPO which is being underwritten by Goldman Sachs as compared to a company which is being launched by some ABC unknown company.

3. Prospectus information – It is imperative that the investors read the prospectus carefully. The company is mandated to provide the true picture of the company in prospectus. It may be a very boring read but still needs to be read. It will give risk and opportunities of the company, loans taken by company and its financial health. It will give general insight about company and its financial health which will help you decide whether to invest in that company or not.

4. Lock-in or lock-up period – As per guidelines, the underwriters and insiders are not allowed to sell the shares of the listed company until the lock-up period is over. This lock-up period can be anywhere between 3 months to 2 years. It makes sense to wait till this period is over to determine whether there is any potential in this stock.

5. Time to be skeptic – While investing in IPOs, it is important that you maintain a skeptic mindset. If your broker is pushing you to invest in an IPO, there are chances that the big companies are not buying the shares and a big chunk is left for retail investors. In most cases, this would not be the case therefore you need to be careful of this aspect.

Hopefully, this stock investing for dummies guide would help you when you are considering investments in an IPO.

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