What is
an IPO? An Initial Public Offering is the first issuance of a
company's shares to the general public. Usually, these are young,
growing companies that have previously relied on wealthy investors
known as venture capitalists to provide such funding. To understand
some IPO jargon, see the IPO
glossary of terms.
How can I participate in an IPO? If you are an individual
investor (as opposed to an institution) you'll have a rough time
obtaining IPO allocations. Institutional accounts are more profitable
for brokers, so these clients have more sway in getting hot IPO
shares. Several brokers are trying to bridge that gap, including
Wit Capital, FBR.com, and Hambrecht & Quist's OpenIPO. Also, Schwab,
Ameritrade, and TD Waterhouse are banding
together to offer more shares to individual investors.
Why do many IPOs tend to have dramatic opening gains? Back
in ye days of olde (at least a couple of years ago), IPOs were merely
a way to secure financing for a company, and triple-digit-percentage
gains were almost unheard of. Now an IPO is becoming a marketing
event where a huge gain is almost expected. The incentive to underprice
an IPO is triggered by the company's desire for headlines and from
the underwriter's desire to ensure profits for its clients. Also,
only a small portion of a company's shares are initially offered
to the public, so many investors are chasing after few shares, often
driving prices skyward.
Why do these hot IPOs tend to fall within a few months?
Lock-up expirations usually come six months after the IPO, allowing
insiders to flood the market with a supply of shares-- here's
a good explanation of this phenomenon. Also, the company itself
will release more shares onto the market in a secondary offering.
For an understanding of how a supply/demand imbalance of shares
affect the stock, take a look at what our analysts have to say.
So should I invest in IPOs or not? Although triple-digit-percentage
gains make the headlines, studies
have shown that IPOs as a group have historically underperformed
the broader market. If you want to buy an IPO, make it only a small
part of your portfolio that you can afford to lose. If you put your
retirement money into an IPO, don't count on ever retiring.
What are some other ways of gaining IPO exposure? IPO
funds are offered by Hambrecht & Quist (which has closed) and IPO
Aftermarket Plus. Many other funds (particularly small technology
funds) often participate in IPOs. Additionally, there are many publicly
traded venture capital stocks (which hold some pre-IPO stock), such
as CMGI,
Internet
Capital Group, and Safeguard
Scientifics.
Is there any Morningstar commentary on various IPOs? Why,
of course. Morningstar.com stocks editor, Patrick Dorsey has some
keen insight about the IPO scene:
Also, here's our take on selected IPOs: Akamai,
Buy.com,
Freeserve,
MP3.com,
Palm,
Sycamore
Networks, TiVo,
UPS,
Webvan,
WWF/Martha
Stewart, 1999
IPO Year in Review.
Where can I find more IPO info? The best place to find
information is from the SEC filings. For these, you can visit FreeEDGAR.com
or the SEC's
EDGAR site. Other handy Web sites include IPO.com,
IPO Express,
Wired News IPO Outlook,
and the Bloomberg
IPO Center.
Do you have any suggestions, or questions? Feel free to e-mail
george.nichols@morningstar.com.
