It’s theoretically possible to triple your money when you invest in an initial public offering (IPO) of a new company. Of course it’s also possible that you’ll lose nearly everything.
Most investors don’t make money from IPOs although most of them won’t brag about it when they lose money. Here are some things that you should keep in mind if you have an impulse get in on one:
- Don’t go all in. This is pretty much good advice in most situations, and that’s why there are so many sayings about it: Don’t bet the farm, don’t put all your eggs in one basket, don’t put it all on the line, and don’t tempt fate. It’s important to make sure that you have a backup plan just in case something goes wrong, and it can. IPOs are for companies that don’t have long track records, and it can be hard to tell from the outside if it’s a good investment.
- Do your homework. Any IPO should have a prospectus that will describe the current state of the business and what the plans of the management are. It should tell you what the expected markets are, the competition, and definitely what the risks are. If they don’t think there are risks, or that they’re negligible, that should be the biggest warning sign of all.
- The house always wins. IPOs are handled by outside underwriters, companies that put up money and then take fees from the company after the IPO. They’re going to make money if the IPO is a success or a failure, so they’re not necessarily going to be independent sources of information.
Understand the risks before you invest in anything, but especially IPOs.