Expect a volatile ride initially

Q: Is investing in IPOs a good idea?

A: Unless you have a longtime horizon and a high level of risk tolerance, the answer generally is no. Initial public offerings, or IPOs, can be rather volatile in their first few months of trading.

To name a few recent examples, Snap went public in March 2017 for $17 per share and now trades for around $13. Meal kit delivery service Blue Apron issued its IPO in June at a $10 share price, and it has dropped by nearly 40% in a little more than a month. On the other hand, real estate company Redfin priced its IPO at $15 just more than a week ago, and its stock has nearly doubled in price.

The point is that after its IPO, a stock’s price can move dramatically. Sure, many double weeks after going public, but others get cut in half or more. Shares of Groupon dropped by nearly 90% in its first year as a public company.

Many experts, including some of The Motley Fool’s own analysts, advise that you wait for six months to a year after an IPO before deciding whether or not to invest. This way, you’ll have at least a couple quarters of earnings to evaluate. One of the biggest problems of IPO investing is that there’s generally a limited amount of information available relative to publicly traded companies.

The bottom line is that you shouldn’t invest in an IPO with money you can’t afford to lose.