What Are the Best Tips for IPO Trading?

Geri Terzo
Geri Terzo
Woman holding a book
Woman holding a book

Investing in an initial public offering (IPO) has the potential to be a profitable experience. Often, investors celebrate new stocks that begin trading in the financial markets by driving up the price of the stock in the debut session. Shares of a new issue may be difficult to obtain as they are often reserved for large, institutional investors. If an individual investor is able to buy shares through a broker or some other means, there are certain techniques that support successful IPO trading. Researching stocks ahead of time, recognizing which large investors are underwriting the IPO, and identifying a time horizon for investing are some tips for IPO trading.

Investments should be researched before any commitments are made. One way to remain on top with IPO trading is to subscribe to some industry newsletter that provides perspective on forthcoming new issues. This way, an investor remains ahead of the news and does not need to make any snap decisions about a new issue when the deal hits the mainstream media. For instance, experts might discuss the factors that could influence the price of a new issue, which could lead an investor to plan the number of shares to buy. Or, an IPO expert might provide analysis on some economic headwinds that could be facing this individual new issue or all IPOs that are scheduled to launch in the near future.

Investors should use discretion before buying into an IPO. New issues can be risky as listing companies have yet to establish trading histories. Some of the most highly publicized new issues are dominated by large, institutional investors making it difficult for retail investors to perform IPO trading. If an industry professional is pushing an IPO to small investors, it does not mean that this stock will necessarily generate profits. Discretion is important, and by combing through a company's prospectus, which is a regulatory filing in a region, investors can gain a sense of a company's profitability or plans to achieve profits.

A new issue's price may have the largest percentage gain on the day of the IPO when a large number of investors are buying shares. If an investor is looking to reap a quick profit, the best IPO trading strategy may be to unload, or sell, that new issue shortly after the debut session. Once trading volume begins to wane, so too could the buying activity that has been pushing up the value of the new stock. Holding onto a stock over the long term can have its advantages, too, but the best approach depends on the investor's time horizon, expectations, and goals for investing.

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