Initial public offerings-where a company sells its first stock seem to offer great rewards-you could get in on the next Apple Computer. IPOs usually are said to be most appropriate to rich investors, where the risks of losing your investment are not the most important thing.
My question: does history show that IPO shares are any more risky than any other shares? Are IPOs also subject to a “pump and dump” menatality? By this I mean that the principals of the corporation are eager to cash in-and their opportunity to win big often comes atthe expense of investors.
What is the investment community opinion of IPOs and their relative riskiness?
It depends on the stock. I got in on an IPO many years ago and had a $250 investment grow to over $3000 in less than ten years.
IPOs are not “pump and dump” – there are usually too many shares for the price to be manipulated that way. What does usually happen is that the big institutional investors can buy at the original IPO price more easily than small investors. If the stock is priced at $25, they buy it at that; you will buy it at a higher price. The institutional investors will then sell it to you – it’s quick turnover, but not pump and dump.
Ultimately, it depends on how good a company is behind the IPO. Apple or Google were good buys because their companies were strong. Others like Thomas Kinkade was a much risker proposition (though it also depends on whether you’re buying long-term or not).