Learning from Facebook: Strategies to Make Money Investing in IPOs
Most investors want to invest in larger corporations, such as Apple and Google. However, buying stock in lesser known companies can also be a great idea. Companies launching an initial public offering (IPO) may be great investments. However, some promising IPO opportunities are substantially overvalued, as Facebook investors discovered in 2012. You may want to research different IPOs on the market and consider investing in IPO stocks.
Investing in Profitable IPO Opportunities
In 2014, the average IPO increased 17% on its first day on the market. However, they are also very volatile investments and some stocks plummet soon after the IPO. You will need to carefully analyze an IPO before investing in it. Here are some tips that you should follow.
Focus Objectively on Fundamentals
Getting sidetracked with glamourous technology trends and flashy products is a big mistake. Facebook investors purchased the IPO based purely on emotion, but the stock has plummeted on numerous occasions.
Investors should always focus on companies with strong fundamentals. You need to answer the following questions to analyze an investment opportunity:
- Does the company offer a product that consumers will want long-term?
- Is the company overleveraged?
- What is the return on equity?
- How consistently have earnings grown over the company’s history?
You need to make an objective analysis of the company before investing in an IPO. Put aside any ideas of brand loyalty or your own frustrating experiences.
Read the Prospectus Carefully
The company wasn’t required to operate with the same level of transparency while it was a privately traded corporation or sole proprietorship. You will want to find out whether its success was partially attributed to unsustainable business practices or profits on short-term investments.
Every publicly traded company must provide a prospectus to its investors. You should read it carefully before investing in the stock. You will want to pay closer attention to the risks that the company raised. It is best to avoid investing in a company that is going to use the proceeds from its IPO to pay off existing debts, because the company is probably struggling to manage its cash flow properly.
Track the Stock Carefully After the IPO
IPO stocks tend to be much more volatile than those that have been on the exchange for a long time. You will want to track them carefully if you plan to invest for the short term. Stock screener allows user to analyze stocks and is one of the best ways to follow the trends. Facebook has dropped and spiked numerous times since the IPO launch. Smart investors waited for the stock to peak and dumped it before it crashed again. Taking a profit shortly after an IPO is often the smartest thing to do, until the company proves to be a sustainable long-term opportunity.