Initial Public Offerings

Initial Public Offerings

How and why companies offer stock to the market

Flipping new issues

Should individuals buy initial public offerings (IPOs) ?

The long-term returns of IPOs : How many Microsofts are there out there?

How and why companies offer stock to the market

Early investors, especially venture capitalists, want to sell stock to the public so they can recoup their original investment

Flipping new issues

New issues are almost always underpriced to ensure the entire issue will be sold

Flippers buy at these underpriced levels and then quickly sell to the anxious public

This can generate a quick profit of 5 to 10 percent in one day

But even flipping has risks

Should individuals buy initial public offerings (IPOs) ?

No

The best IPOs are saved for large mutual funds and other good clients of the underwriter

Individuals, as a rule, simply aren't offered the better IPOs

If a broker does offer you an IPO, it's usually a low quality company that you don't want to buy

The long-term returns of IPOs : How many Microsofts are there out there?

In general IPOs have underperformed the market

IPOs may do well in their first days or months, but after a few years they generally do worse than the overall market