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Does IPO spell investment success?

POSTED: August 16, 2007 5:03 a.m.

If you’ve ever spent any time among investors, you’re bound to have heard someone say: “If only I had gotten in on the ground floor of Company A (or Company B or Company C).” In investment terms, “getting in on the ground floor” means buying a company’s stock shares when they first go on sale — an initial public offering (IPO), to use the official term. But is it really that desirable to invest in an IPO?

Before you can answer that question, you need to be familiar with the “nuts and bolts” of IPOs. In the first place, a company goes public because it wants to raise money to expand its operations. There’s certainly nothing wrong with that, but you need to keep in mind that the IPO is being launched for the company’s benefit — not yours.

Next, you need to be aware that it may not be as easy to “get in” on an IPO as you might imagine. Generally, it’s not really possible for everyday investors to truly take part in the “initial” part of IPOs. That’s because public offers typically fall into two classes: primary offerings and secondary offerings. Primary offerings are usually only available to institutional and investors who buy big chunks of stock. About six months or so after the IPO, the initial purchasers start to sell their shares, via the stock markets, to individual investors; this is the secondary offering. (The well-publicized Google IPO of 2004 operated differently. Google sold shares via an online auction, which was designed to give individual investors the same opportunity to buy shares as institutional and ultra-wealthy investors.)

There’s no denying the “wow” factor that exists for many people when they take part in an IPO, even if it’s the secondary offering. After all, it can be exciting to be among the first investors in anything. And at first glance, IPOs sound great. You get on that proverbial ground floor, and then, as the business grows, your stock shares are worth more and more, right?

Actually, it’s not that simple. Initially, you might see a big spike in the stock price of a company that’s just gone through an IPO. But, over time, these companies are subject to the same economic and market forces as all other businesses. Consequently, their stock prices will go up and down, as is the case with all stocks.

So, before you buy shares through an IPO, you’ll want to evaluate the company pretty thoroughly. Are its products or services competitive? Does it have a track record of consistent growth? Does it belong to a thriving industry? Is its management team experienced? You can get some of this information from a company’s prospectus, but you will also want to do some outside reading, as well as consult with your financial advisor. Obviously, the more you know, the better off you will be.

In any case, if you do invest in an IPO, don’t go into it thinking that you are going to make a “killing.” Instead, look at an IPO as a long-term investment. If it’s a stock that fits well into your overall portfolio, getting in on the ground floor may help you build a strong foundation for working toward your long-term goals.

Jeff Hupman is a financial advisor with Edward Jones in Rincon. For more information, call him at 826-2694.

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