An IPO is usually surrounded by a lot of chatter in the major financial centres, largely because it is an opportunity to experience securities of a new business for the first time, which have the potential to skyrocket in value and create riches overnight.  Unfortunately IPOs aren’t always that straightforward, and as an investor you must have your wits about you in order to profit from an IPO.

Why Buy?
The main reason to buy at an IPO is that the capital raised from the offering will likely be used to fund growth projects, which in turn will ultimately improve revenues, all going well.  Resultantly, the value of the shares you bought at rock-bottom will increase significantly, giving you a handsome return on resale.  Similarly IPOs are in very high demand from the off, and in some cases even a quick resale will yield a decent return.

Another key advantage in buying shares is that the IPO will be hyped in the financial media, or at least discussed at length, which will create in itself a market for the shares.  By getting in at the ground level you can capitalise on the momentum from the media hype to resell your shares at a profit.

Why Not?
Of course, in an ideal world the reasons for buying at an IPO would far outweigh the reasons for not.  Unfortunately, that isn’t always the case, and it’s important to be wary before you jump in head first.  Whilst the media hype around an IPO may be good for short term value, it might also have the opposite effect.  It’s not unknown for shares to be launched at an inflated value simply because of the buzz around their IPO, which can prove costly for the serious investor. 

Secondly, there is very little in the way of a track record for their share performance, so you have no way of knowing whether a particular price is a good exit point.  Additionally, IPOs generally occur in periods of rapid expansion which has the possibility of causing problems within the business as well as simply turning out successful.  All in all, IPOs can go one way or the other, and for the careless investor that’s a recipe for disaster.

Buying at an IPO might be a good idea, but it depends very much on the company you’re talking about, and the industry in which they do business.  Before investing in an IPO it’s important that you take the time to do your on research on the company and its marketplace, rather than relying exclusively on the judgement of the financial press, and make up your own mind before rushing in with the crowds.