There have been several large IPOs so far this year, with the biggest being the Facebook IPO. However, many of the last large IPOs have been a bust, with their share prices falling in the weeks after the IPO. While you can’t always predict what will happen after an IPO, here are five things that you should look for when investing in any stock IPO.
What to Look for in an IPO
1. The History
The problem with an IPO is that there isn’t much history to go off of. All companies are required to file their last few years of financial results, but that doesn’t always tell the whole story. However, when looking through their history, look at their type of corporate finance and see if they’ve restated anything. Continuous accounting is always more favorable than changing methods several times.
2. The Lock-Up Period
Another thing to consider is the lock-up period before any insiders can sell. Remember, the owners of the company are not technically rich until they’ve sold their shares, so the period after lock-up is important. Are the insiders selling, or are they holding?
3. The Price
The price of the IPO is also a good indicator of how the company is going to perform. If the price of the IPO has risen several times, chances are the stock isn’t going to pop too much since the price is higher. However, if the price has stayed low (or about the same as the initial spread), chances are it could pop.
4. The Future Business Model
Whenever you invest in any stock, you should always consider the business as a whole, and where it is going. Chances are the company is going public because it has had a lot of success, but will that success continue into the future? What is in store for the company in 5 years?
5. The Risks
Finally, you should consider the risks of the market when investing in an IPO. Many IPOs don’t skyrocket in price like Google. In fact, many fizzle and trade well below their IPO price for years. Keep that in mind when investing in an IPO.
Guest Post by Robert