Monday, October 15, 2012

Invest in The IPO (Initital Public Offering) Market

Investing in IPO, few advices to invest safely in IPO Initial Public Offerings
Investing in IPO is risky but can be a very profitable if prior analysis is done correctly. Investing in IPO does not mean investing blindly in every company that goes public, here are few advices that everyone should follow
  1. Avoid the Hyped IPO, we all remember Facebook first day on wall street.. , popular IPO  are often a disaster as the price moves up to fast and too far before the normal investor (You) is able to buy shares. For hyped IPOs , only the high net worth investors, Hedge Fund and insiders are able to lock some profit as they can buy the shares at the lowest price available before everyone else.
  2. Invest in  fundamentally sound IPOs with a good growth rate, for this you must search as much informations as you can, indeed private companies are not covered by 100's of analysts so it makes it difficult to find informations, look at the financing and past news releases to make sure you are getting into a wise investment.
The IPO Market has probably made more millionaire than any other market, according the financial writer David Menlow.
If we look at the first trading day of some IPOs it can often be huge, for example the first trading day of Baidu the chinese internet giant, the price rose by 354% on its first day on the market, another example: Linkedin entered the Nasdaq on May 19, 2011 and rose by 109% on that day.

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Although many investors are reluctant to enter the IPO market, here are few ways to spot an interesting IPO:

  • High and Long-run Growth prospect: Look at the future growth of a company, and companies that have at least 10 years of growth potential
  • 2 Years of Profitability: This is a very important one, most of the companies who decided to go public during the dot com era where lacking the 2 years profitability back up, indeed 75% of them headed right to the wall because of this.
  • $60 million in Annual Revenue: According to the University of Florida, a company that had sales of above $60 million in revenue before the IPO rose on average by 39.67% on the next three years following the IPO, while a company having less than $60 million in revenue, rose by only 5% on the next three years.
  • Age of the firm: Make sure the company you are investing in has existed long enough before going public, and is using the IPO to expand existing business, not to be on the cover of the wall street journal.
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