As this bull market continues to rage on, initial public offerings (IPOs) have become more common; in fact, this most recent week was one of the busiest in the past three years, signifying companies believe equity markets remain robust and valuations remain high, indications that investors believe putting their money to work in equities today is still one of the best uses for their hard-earned cash.
IPOs, on the other hand, are much more risky than your traditional stock investment for a number of reasons. First, the true valuation of the market is unknown, so how a given company decided to price their offering is very difficult to determine without serious financial analysis ahead of time.
Jumping into an IPO with two feet without doing any homework whatsoever with respect to a company can be a serious mistake, with even some of the greatest companies of all time seeing stock price declines in the weeks and quarters following their initial offering.
That being said, looking at high profile IPOs of late, including that of retail mega-giant BJ’s Wholesale Club Holdings Inc. (NYSE:BJ), we can see that investor enthusiasm has certainly served early investors well; shares of BJ’s closed nearly 40% higher in its first day of trading on Friday, with investors believing the valuation ascribed to the company by investment bankers to be far too low at the time of issuance.
For every amazing story like BJ’s, there is a Facebook, Inc. (NASDAQ:FB) to counter. For those looking to invest in IPOs, invest only a small portion of one’s portfolio in such holdings, unless you’ve really done your research.
Invest wisely, my friends.
