IPO Participation and Investing
There are a lot of investors who fret that they will miss out on the next big thing due to their lack of access to the IPO market, but studies have proven that IPOs underperform the broader markets historically. This is a fact and it should come as no surprise considering that while new issues may be high-reward, they are also high-risk investments. You can score big if you pick the right stocks, but the chances are higher that in a few years your IPO will be languishing below its offering price.
The best method of investing in an IPO is to purchase shares from one of the banks managing them, which give them at the offering price, before they are traded. The lead underwriter usually prices the new issue reasonably, and typically hopes to get a 15-percent premium above the offering price when the trading of the stock starts. However, it is not an easy task for the average retail investor to buy stocks at the offering price, before it is traded in the market. But now, with banks making an effort to reach out the retail investor community through mergers and alliances, this task has become much easier. If you want to buy an IPO at the offering price you should have an account with a broker having access to that deal, meaning one of the banks which are part of the selling syndicate. The “underwriting” section in a company’s SEC registration is where you can find the names of the banks on the syndicate for any deal.
After that, all you need to do is inform your broker how much you want to invest in the IPO. Your success will depend on several factors like, the number of shares being offered in the deal, the allocation your broker’s bank is getting, the size of your account, the amount of trading done by you, your relationship with the broker, your broker’s skills, etc. There are a lot of brokers who do not realize that they could get IPO allocations for their clients. Brokers receive a good commission for selling the shares in new issues, so they are reserved for the most industrious and best salespeople.
In case you are not related to any managing bank and you are interested in investing in IPO, then you can try to start an account, making a condition that you will receive some shares in the new issue you are interested in. But this tactic may not bring you much luck. IPO shares are saved to reward an organization’s most active, biggest, and longstanding customers.
According to analysts, you need to be patient if you cannot get an IPO at the offering price. It might be very exciting to see the stocks soar on the first day of trading, but it can also be a dangerous way of investing, especially if you are planning to be there for the long term.
When a stock starts trading, the prices rise to an artificially high level initially. The demand is often heavy in the beginning due to the hype that surrounds an IPO, along with the strong selling efforts that are employed by the syndicate. Another benefit you will get from waiting before making an investment in a new issue is the analyst research report that comes out around 25 days after the trading of a stock starts.