Personal finance

Here’s what to consider before you invest in that next IPO

The Fearless Girl statue is seen in the foreground as a banner announcing the IPO of Uber Technologies hangs outside the New York Stock Exchange, May 10, 2019.

Andrew Kelly | Reuters

You don’t have to tell Willis Williams that the initial public offering calendar has been busy this year.

Williams, 44, a New York area digital marketing strategist who helps create advertising campaigns for social media, has been regularly tracking which companies are going public and when.

His goal: To buy the shares of the companies early so that he can be in on it if the stock takes off.

Williams’ interest in IPOs started with Twitter, which went public in 2013, and then extended to other newly public companies such as Uber, which debuted on the New York Stock Exchange in May.

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To stay up to date, he tracks when those shares will become available to retail investors through his brokerage account.

“I really missed out on Google,” Williams said of the company’s 2004 IPO, which saw its shares rise 18.05% on its opening day to close at $100.34. Fifteen years later, the stock had climbed by more than 2,600%.

“I am a strong believer in buying into companies you use or you really like,” Williams said. “As soon as it opens, I buy it.”

Willis Williams

Investors such as Williams have been in luck this year, with familiar brands — including Uber, Lyft, Levi Strauss and Pinterest — opting to raise money on the public markets.

IPOs allow private companies to raise money by selling shares publicly. The companies typically list on the public markets, such as the NYSE or Nasdaq, giving public investors the ability to invest in those stocks. The company’s existing private investors, meanwhile, often have access to those shares at a premium.

The market’s appetite for new IPOs is still strong, if the upcoming listing of oil company Saudi Aramco — poised to be the largest IPO to date — is any indication.

But there are some key things to keep in mind if you’re an investor looking to wade into these deals.

You don’t have to be first to the party

It may not be easy to get in on an IPO deal early.

That’s because to participate, you often have to have an account at a brokerage firm that is participating in the deal, notes Barry Glassman, founder and president of Glassman Wealth Services, with offices in Vienna, Virginia, and North Bethesda, Maryland.

The deal’s availability may also be limited by how many shares are actually going public and how much demand there is for the offering, Glassman, a certified financial planner, said.

“We’ve seen investors request shares, and then get a much smaller allocation, or a token allocation, or shut out from the allocation,” he said.

Investors who are interested in an IPO can start by checking with the financial institutions with which they’re currently affiliated to see if they can get in.

But those same investors would be wise not to rush, according to JJ Kinahan, chief market strategist at TD Ameritrade.

“You don’t have to be the first one to the party,” Kinahan said. “Too often, people get very excited about a product, and a great product does not necessarily mean a great stock.”

Make your timeline your first priority

Whether you invest in an IPO or not should first be determined by whether it makes sense for you personally before you consider the particular investment’s risks.

One important question to ask yourself: What’s my time frame?

“If you’re in just for some quick flip, that’s a very risky type of investing behavior,” Kinahan said. “There’s a reason that it often doesn’t work out really well, because it’s hard.”

If you do plan to hold onto the stock longer, it’s also important to keep in mind that you don’t necessarily want to wager your safe investments — the funds you will rely on in retirement — on a risky bet.

The ideal investor for an IPO, according to Winnie Sun, founder of Sun Group Wealth Partners in Irvine, California, is someone with a high net worth, who has been in the market for a long time and who has a hold mentality.

Another key point they need to be able to check off, Sun said: No outstanding personal debts aside from a mortgage.

Do your research before investing

Once you’re convinced you are able and willing to take on the risk personally, it’s important to assess the particular investment’s risks.

If 2019 is any indication, that will include winners and losers. Beyond Meat turned in one of the best first-day trading performances, when its stock climbed 163%.

But the recent expiration of its lockup period, when inside investors can sell the stock, sent the share price down by more than 20%.

Weak demand led WeWork to ultimately pull its IPO plans and reassess its strategy.

“There are periods in time where the great successes are so great, they blur out the handful that don’t work out,” Glassman said. “2019 has been a balanced year of hits and flops.”

In order to really know what you’re getting into, investors should study a company’s disclosures, such as the Form S-1 filing with the SEC. Companies that are listing in the U.S. are required to file that disclosure, which outlines all the potential risks of investing in their business.

One way investors can also protect themselves: avoiding an all-or-nothing mentality, according to Kinahan.

“If you have 300 shares to buy, maybe you buy 100 to start,” Kinahan said. Having a partial mentality can help investors avoid panicked transactions both on the way in and out of an investment, he said.

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