Initial Public Offerings are like the car accidents or hockey fights of the investing world; you know you should look away but it's impossible to resist a guilty glance.
They epitomize the emotional nature of investing – a new up and coming company that may be the next Procter & Gamble or Apple coming onto the scene with high hopes and a great idea.
But there are plenty of IPO busts, just ask recent Zynga and Groupon investors.
Sadly the market doesn't operate for long on emotions, unless it's toying with individual investors' emotions to get them to buy something. It's the numbers that matter and hyped launches often turn into costly long-term investments. They can be more like impulse purchases that you regret almost as soon as you buy them.
That's not to say all IPOs should be avoided.
But you have to do more than just listen to the media pundits to know which IPOs are worth your energy, effort – and most importantly money.
And that's what this report is all about. We take a deeper look at the IPO market. You'll see how to evaluate IPOs, the best way to spot the IPO winners (not the headline grabbers), and what IPOs to avoid in the coming weeks and months.
Before we show you the best IPOs on the horizon, let's look at the secret to investing in IPOs.
Ever since the Dutch East India Company became the first to issue stocks and bonds to the public in 1602, investors have seen initial public offerings (IPOs) as the road to riches.
Think back to the dotcom craze of the late 1990s. You'll remember it spawned a feeding frenzy among investors chasing after internet IPOs on an almost daily basis.
It wasn't long before investors on Main Street took the bait after watching hordes of new college graduates in Silicon Valley become instant millionaires.
But as companies with unproven business models executed massive IPOs with sky-high prices, many investors who succumbed to the siren call got clobbered.
Pets.com for instance, raised $82.5 million in an IPO in February 2000 before imploding nine months later. And EToys.com stock went from a high of $84 per share in 1999 to a low of just 9 cents per share in February 2001.
In both cases, small investors were left holding the bag. The point is IPOs have always been high-risk, high-reward.
Here's what you need to know...
First of all, most companies go public to raise capital, either by issuing debt or stock. After all, being publicly traded opens the door to potentially huge returns for the owners.
But that's not all.
Public companies pay lower interest rates when issuing bonds. They also can issue more stock to grow through mergers and acquisitions.
Then there's the prestige factor, the pure ego satisfaction of hobnobbing with the fat cats on Wall Street.
But from an investor's point of view, the road to prosperity with companies going public is often fraught with peril.
You see, most IPO s leave retail investors completely behind. Typically only the biggest clients with the deepest pockets are going to get in on a hot IPO.
These institutional clients usually have a cozy relationship with one of the underwriters - such as investment banks Goldman Sachs, JPMorgan Chase or Morgan Stanley.
The underwriters work behind the scenes with the company to compile the proper regulatory filings with the Securities & Exchange Commission, handle the paperwork and determine the offering price of the stock.
If the underwriters know the IPO will be in great demand and the price is likely to jump, they'll shower their favorite institutional clients with an allocation at the initial price.
But retail investors can still make money on companies going public. You just have to do your homework.
For instance, Amazon.com (Nasdaq: AMZN) went public on May 15, 1997, with an IPO valuation of $441 million. Today it's $140 billion.
EBay Inc.'s (Nasdaq: EBAY) IPO valuation on Sept 24, 1998 was $2 billion. Today it's $67 billion.
Just remember, don't buy a stock just because it's an IPO. Buy it because it's a great investment. Nearly 99% of the time, the initial success of an initial public offering (IPO) is determined by the firm - or firms - who sponsor it, the offering price, and how early an investor can get in.
And the best time for most investors to buy IPOs is AFTER the initial mania settles down.
This could be weeks or months after the initial offering. The key is to be patient.
There are two reasons these delayed entries into IPOs can be golden for those who jump in at precisely the right time:
Now that we've covered the ins and outs of IPOs, we'll show you eight potentially blockbuster IPOs and three to avoid like poison.
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