IPO Investing’s Biggest Dangers
Investors see companies that post triple-digit gains on their first day of trading and figure if they jump in right when the stock goes public, they’ll still capture most of those profits.
However, when a stock opens up 100% higher than the initial set share price, that’s where the retail investor is buying in. Those who just bought in are missing out on the 100% gains the wealthy IPO investor already banked.
Now, if the stock pares its gains and finishes its first trading day up 50%, the retail investor has then lost 50% of the original investment.
Those “ultimate insiders” who were in before the stock went public are left celebrating a 50% one-day gain.
Another challenge for the retail investor is finding the right IPO to invest in. Companies going public will naturally promote the best parts of their businesses, and bury the less desirable information.
To someone without a deep knowledge of the company, most IPOs will look compelling, even when they’re not. That leaves many retail investors striking out on IPOs they thought were home runs.
While IPOs pose numerous risks to retail investors, there are still ways to profit from the IPO market…
Using IPO ETFs to Your Advantage
IPO ETFs like the First Trust IPOX-100 Index Fund (NYSE Arca: FPX) and Renaissance IPO ETF (NYSE Arca: IPO) are open to everyone and are great ways to play the IPO market.
FPX, created in 2006, aims to avoid the early share-price rise and fall that can trap some investors. It aims to correspond to the performance of the IPOX-100 U.S. Index, which measures the performance of the top 100 companies ranked by market cap in the IPOX Global Composite Index. The global index only includes a stock after it has been trading for at least seven days and removes a stock on its 1,000th day of trading.
According to the Renaissance fund, it holds only the largest and most liquid newly listed U.S. IPOs. Stocks are only added to the portfolio after they have traded for at least five days and are removed after two years.
Granted, one-day triple-digit gains are rare with these ETFs, but so too are major losses.
For investors who aren’t yet among the “ultimate insiders,” these ETFs offer the best way to play the IPO market.
You see, there’s an Alibaba “Shockwave” Effect – this company’s debut is so huge, and it’s such a major play in its market, that related investments are already on the rise.
We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars;new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet. And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.