Do you know anybody who's tripled his money investing in the
IPO (initial public offering) of a hotshot new company? It can happen. And many
investors thought the recent Facebook IPO was a way to quick riches.
Yet the truth is, most investors don't make money playing
IPOs. It's just that no one brags when they lose money. Nonetheless, investors
of all kinds are lined up for a shot at the next IPO. So it pays to know the
facts before diving in.
First bit of advice: Don't bet the farm. The problem is that
generally IPOs are issued by companies with no track record, inexperienced
management, and few assets. And, unfortunately, the underwriters for these IPOs
are motivated to complete the transaction, collect their fees, and move on.
Their compensation is linked not to the quality of the firms they take public,
but rather to the number of deals they sell to the public.
To protect yourself, you must do your homework, as you would
for any investment. A company planning an IPO writes a prospectus that
describes the business and details management's plans for what they intend to
do with the money, how fast they intend the company to grow, and what profits
they expect. The prospectus also discusses the competition and markets, and,
most importantly, describes the risks of investing in the IPO.
Do the necessary research, and be sure you understand the
risks before you make an investment in an IPO.
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