Beware Of Trading Recent IPOs

It really is amazing when you see how excited people get when a hot IPO (initial public offering) is scheduled to be released. All of the hype and media attention seems to get people giddy about buying a company that usually does not make a profit. Think about it, a company usually comes public in order to raise capital. They will then used the money they raise to grow the business and ultimately make a profit in the future. Sure, there are many successful IPOs throughout the years, but there are also many failed IPOs as well.

This year was a hot year for IPOs. Companies such as Uber (UBER), Lyft (LYFT), Beyond Meat (BYND), Pinterest (PINS), Slack (WORK), Zoom (ZM), Crowdstrike Holdings (CRWD), Peloton (PTON) and others started traded this year. Many of these stocks are actually trading below their IPO price. You see, it is very difficult to trade a stock that does not have a long history. There simply is no past chart data to work off of to discover a proper price for the equity. If you buy these stocks at some point you are simply hoping for it to trade higher. The last time I checked, hope was not a good strategy for finding winning stocks.

Personally, I cannot trade a stock that has not been around for at least a year. Typically, I prefer to trade in stocks that have at least a five-year history in the public market. I once read that Warren Buffett does not participate in the IPO market and that should be noted by most traders and investors. Now some people might have that gambling bone in their body and enjoy the rush of participating in an IPO. I’m not a gambler, I’m a trader. The difference is that the trader has the odds in his favor and gambler does not. Oh, here is one quick tip that many traders should remember, if the IPO is easy to get into it is usually a going to be a flop and likely sell-off after it begins trading. I have seen this happen so many times. Here’s the moral of the story, beware of trading recent IPOs.

 

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