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Editor's Note: Record-high markets have investors hoping for an IPO resurgence in 2018. Before jumping into any new debut, take a second to review Sid's IPO investing strategy. His tips could mean the difference between a steep loss and lasting returns…
I'm sure everyone has read at least one story about an investor who made a fortune buying some now-famous company on the day it originally started trading on the open market.
In some cases, the key to that fortune was buying a relatively obscure company that no one had heard of and then waiting for it to become the next Apple.
All too often, though, the mainstream financial media overlooks these unknown companies in favor of focusing on "marquee" listings like Facebook, Twitter, and LinkedIn.
Social media companies, for example, are somewhat akin to the IPO flavor of the month.
I'm not saying Facebook, Twitter, and LinkedIn are necessarily bad investments, but marquee stocks are typically overpriced.
They also have far less upside than small, less-covered companies…
Media Coverage Will Bury Your Returns
Unless you are a prized client of the underwriting bank, you're going to be picking up shares in the secondary market. Even if you stage your order before the open and it fills just seconds after the opening bell rings… it's still the secondary market.
That means you could end up paying 20%, 30%, 50% or more above the offering price because your order was queued alongside of everyone else who drank the pre-IPO Kool-Aid.
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To use the infamous new car analogy, you can be thousands in the red the minute you drive it off the lot.
It's simple supply and demand.
If there are far more buyers than sellers, the price will automatically trade at a premium to the offering price, regardless of the stock's fundamentals. And in the case of IPOs trading in the secondary market on the opening day, that premium can amount to 100% or more.
Don't be suckered into overpaying for a newly listed company just because every commentator on television is hyping the living daylights out of it.
Remember, they're in the business of ratings (not information), so their over-coverage of an IPO is driven solely by popularity of the topic.
When to Buy In to the True IPO "Rockets"
About the Author
Sid is the investment community's best-kept secret. Since 2009, he's served at Money Map Press as Director of Research, analyzing thousands of securities and profit opportunities for subscribers. He's an expert in identifying "alpha" potential in a wide variety of industries, but especially the small-cap sector, where he's discovered a pattern of profits that's almost foolproof. In Small-Cap Rocket Alert, Sid uses a single precise trigger - the "Launch Alarm" - that consistently forecasts when small-cap stocks are on the verge of propelling to new highs, making investors potentially life-changing gains in the process.