Should new investors buy stock in initial public offerings, also known as IPOs? Why are they considered to be dangerous?
The initial public offering process is actually a pretty straight forward concept. An IPO occurs when a stock that is currently privately held decides it wants to raise extra money by going “public”. The whole point of an IPO is to raise capital for expanding the company. The trade off of any IPO is that the company is no longer private and is forever under scrutiny by market analysts and the general public.
IPOs are considered dangerous because the first day the company is publicly traded under its new stock symbol the stock price typically fluctuates a lot (you can’t buy the stock until its first day). The first few weeks are even more dangerous as the stock either makes headway and pushes ahead or pulls back in price. For example stocks like Mastercard (MA) and Google (GOOG) did very well there first few months and still are growing strongly today. On the other hand you have companies like Vonage (VG) who’s stock price fell sharply its first few months of trading publicly.
As a result, for new investors it is a toss up as to whether or not they should buy stock in IPOs. As soon as the stock starts trading publicly and an investor buys shares they are taking on intensified risk and uncertainty. Any purchase of shares should be proceeded with caution.