How to take advantage of an IPO

Investing in an initial public offering (IPO) is not always the right course of action, and it can be hard to find useful and compelling background information. Several high-profile launches have brought initial offerings to the fore, with some seeing more success than others. It has to be about more than riding a short-term trend, but what do investors need to know?

1. Know when to stay away. The lack of available information can be off-putting, and it is important to think logically with IPOs. Don’t let emotions take over, since this is an investment like any other, where you should be looking for viable long-term business models.

2. Time it right. IPOs are often undervalued, and while a company’s stock may increase in value directly following an IPO, this can quickly reverse. It can also be worth waiting until the lock-in period ends to see whether original backers of the company keep their money in it or sell their stock.

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3. Read the prospectus. Objective information is hard to come by in these situations, and while the prospectus is aimed at encouraging sales, it is still worth reading. It will give an indication of the company’s risks and opportunities and what it will use the money from the sale for, which can often give a good indication as to whether it’s right to invest in.

4. Consider the price of the stock. It can be hard to assess whether stock is well-priced or whether you’re paying over the odds (or, conversely, getting a good deal). It is useful to look at the growth prospects over the next few years and how predictable the earnings are.

5. Look for other indications of success. Less historic trading history and lower level of disclosure than already-public companies means investors need to look at other factors to see what a company is like. If it manages to retain chief executives and other high-level positions for long periods (especially since the beginning), this can be a good indication of a strong operation.

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