Even amid a pandemic, many popular companies have gone public, giving investors an opportunity to purchase their stock.
But getting in early might not be the best strategy.
Two major initial public offerings, or IPOs, hit the market this week with strong performances in their first day of trading. On Wednesday, DoorDash closed 85% higher in its trading debut, and Airbnb jumped 112% during its first day as a public company Thursday.
IPOs have been on a tear this year in the market’s epic recovery rally from the coronavirus-fueled rout in March. So far this year, 203 IPOs have raised $74.9 billion, according to Renaissance Capital, which advises investors on IPOs.
And many have performed well. The Renaissance U.S. IPO Index is up more than 113% year to date through Thursday’s close.
Even though IPOs have had a solid year, investors should still proceed with caution, according to financial experts. The stock market has been choppy in recent months, and not every newly public company continues to climb after a strong debut.
“People should be cautious about IPOs because they tend to be overpriced by the time it is available to the public,” said certified financial planner and CPA Anjali Jariwala, founder of Fit Advisors. “Just like any investment, you should practice prudence and not get carried away by the media frenzy.”
Arrows pointing outwards
IPOs are a way for privately owned companies to raise money by selling shares to the public. Before a new stock issue reaches the market, investment banks, which generally underwrite the IPO, sell shares.
Typically, those pre-IPO shares are reserved for sophisticated investors or institutions with access to such deals. Those buyers may be required to hold on to the stock for a certain length of time — six months, often — before they can sell it.
Retail investors usually have to wait for trading to start through a market like the New York Stock Exchange or Nasdaq, meaning that they’re already set up to make less than earlier investors.
If there’s demand for the newly public company, the stock price will pop right after opening. This happened to Beyond Meat, which skyrocketed more than 163% in its highly anticipated trading debut in 2019.
On the other hand, if there’s lack of demand or markets think the company is overvalued, shares could fall. Uber slumped more than 7% on its first day of trading last year.
If a stock falls in its trading debut or soon after, it doesn’t mean it won’t go back up again. But you could be waiting a while.
For example, Facebook — which now trades above $275 — debuted in May, 2012 at $38 share. By September of that year, it had dropped below $18. It took another year for it to climb back up to its initial offering price.
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It’s important to do your research on a company before blindly jumping in just because it’s a newly listed stock, said Doug Boneparth, CFP and president of Bone Fide Wealth in New York.
That includes checking out its S-1 filing with the Securities and Exchange Commission to scrutinize the balance sheet and find out the potential risks of investing in the stock. (SEC Form S-1 is the initial registration form for new securities required by the SEC for public companies that are based in the U.S.)
“If you’ve done your due diligence, the company has strong fundamentals and you believe in the company for the long term, then it can be good to get in early,” Boneparth said. “The price might be much lower today than years down the road.
“Just don’t buy hype,” he said. “You’re buying a company.”
