Learn more about IPOS

It can be exciting when a company first starts trading on the stock exchange via an initial public offering (IPO), and investors are often eager to rush in and snap up shares. That frequently turns out to be a mistake, though. Learn more about IPOS before you invest in any.

An IPO involves a company selling part of itself to investors by issuing shares. (Alternatively, it might raise money via banks or private investors, or by issuing bonds.) Some big-name IPOS last year were Pinterest, Zoom Video Communications, Uber Technologies, Lyft, Slack Technologies and Peloton Interactive. Airbnb is looking to hold an IPO this year.

One problem with IPOS is that most investors can’t buy shares at their initial prices. It’s often big clients of the underwriting investment banks — such as pension funds, mutual funds, private equity firms and high-networth individuals — who get that privilege. With a hot IPO, the early investors get in at the low initial price, and then stock begins trading at a higher price due to great demand.

Also, IPOS tend to be volatile. Often the companies are relatively young, without long track records of profitability. The IPO process itself also contributes to volatility, with the price often surging initially and then sinking back to earth after a few days, weeks or months.

Consider Pinterest. It was initially priced at $19 per share when it debuted in April 2019, but due to heavy demand, it opened trading 25% higher, at $23.75. It closed that day at $24.40. Shares fell to a bit above $18 in early January 2020, dropped nearly to $10 at one point in March, and recently climbed above $36.

It’s often best to steer clear of IPOS in order to let the dust settle and give management a chance to operate as a public company for a while, issuing required quarterly and annual reports. There are usually plenty of other great and more established companies to invest in — at attractive prices.