Should New tradersTrade Initial Public Offerings?

Should New tradersTrade Initial Public Offerings?

What Are Initial Public Offerings (IPOs)The initial public offering process is actually a pretty straight forward concept. An IPO occurs when a stock that is currently privately held decides it wants to raise extra money by going “public”. The whole point of an IPO is to raise capital for expanding the company. The trade off of any IPO is that your company is no longer private and is forever under scrutinty by market analysts and the general public.A large IPO is usually underwritten by a “syndicate” of investment banks led by one or more major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold (called the gross spread). Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest commissions–up to 8% in some cases.

Multinational IPOs may have many syndicates to deal with differing legal requirements in both the issuer’s domestic market and other regions. For example, an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other selling groups.Because of the wide array of legal requirements and because it is an expensive process, IPOs typically involve one or more law firms with major practices in securities law, such as the Magic Circle firms of London and the white shoe firms of New York City.Public offerings are sold to both institutional investors and retail clients of underwriters. A licensed securities salesperson ( Registered Representative in the USA and Canada ) selling shares of a public offering to his clients is paid a commission from their dealer rather than their client. In cases where the salesperson is the client’s advisor it is notable that the financial incentives of the advisor and client are not aligned.

IPOs are considered dangerous because the first day the company is publicly traded under its new stock symbol the stock price typically fluctuates a lot (you can’t buy the stock until its first day). The first few weeks are even more dangerous as the stock either makes headway and pushes ahead or pulls back in price. For example stocks like Mastercard (MA) and Google (GOOG) did very well there first few months and still are growing strongly today. On the other hand you have companies like Vonage (VG) whoâ€™s stock price fell sharply its first few months of trading publicly.Trading IPOs SuccessfullyAs a new investor you are going to be getting used to your online stock broker and just trading in general (see my post on how to buy stock) , so should you mess around with these risky new companies?

I would say you would need to have a strong understanding of the following concepts: 1.How to read stocks charts which covers the basics behind reading a stock chart. 2.Volume interpretation with stock charts which breaks down distinguishing a accumulation day versus a distribution day on a stock chart.3.60 stock market tips for success, these are weighed from the CANSLIM style of trading. 4.An understanding of institutional support and overall strong fundamental analysis.Now, not all IPOs need to be traded exactly the same way but this is just one way to trade them successfully. So should new traders invest in IPOs?I would say no. If you are a new trader just taking the reigns this may not be the best place to put your money, but the case and point as a new trader is that we don’t know exactly to look for. The extra risk attached to buying into a brand new stock is just not worth it.I would give a fresh new IPO stock atleast 3 – 6 months before considering it as a trade. Otherwise stay away OK

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