Education: Aggressive Growth Investing

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Navigating IPO's

The term “IPO”, or initial public offering, conjures up images of millionaires being created overnight during the halcyon days of the internet bubble. It was quite common to see unproven technology and growth stocks shoot up 300%+ on their first day of trading, making executives instant multi-millionaires.

Unfortunately, many small investors got burned by buying these stocks with the hopes of finding the next “Microsoft”. Too often, investors found the next pink sheet stock. The IPO market doesn’t have to be off limits to growth investors, but there are definitely some prudent moves you can make before you dive in.

Early Bird Catches the Storm

Unlike most things in life, being early to a hot IPO can be disastrous. Unless you were allocated some shares at the actual opening price, it is best to wait until the initial hype dies down, because you will likely be buying the shares that the big boys are selling on the first day.

If indeed the company is worthy, there is no need to rush to get in. Holders of Microsoft had many years to get in before the stock really took off. Companies that receive a lot of hype before the IPO date are often “oversubscribed”, which means the demand for their shares will be huge on the first day. These are the ones to avoid buying right away, as the investors will be flipping the shares rampantly.

Don’t Get Locked Up

Speaking of patience, you should be aware of when the lock-up period ends, and think about buying afterwards. The lock-up period is a legal contract (usually between three to 24 months) between the underwriters and insiders of the company prohibiting them from selling any shares of stock for a specified period of time.

The share price often drops as soon as the lock-up ends due to a flood of insider selling, but this is when the true believers are revealed. Insiders who hold their shares could be hinting that good times are ahead. Holding shares through the lock-up period is a vote with their wallet that they have confidence in the future. This could be a good indication for you to follow suit and buy.

Back to Basics

Many people ignore a company’s prospectus, but they do so at their own peril. This boring, yet important read contains vital information regarding the company’s prospects (hence the term “prospectus”). It always states in plain English the company’s risks and how it intends to use the proceeds from the initial public offering. You should take notice if the company doesn’t use the money for research or expansion of some sort. This is especially true for aggressive growth companies, as their main aim in going public should be to fund expansion.

Common Sense

The main thing is to use common sense when investing in IPO’s. Don’t gamble with hot, unproven companies that are up 400% on the first day, especially without reading the prospectus and knowing what the company is all about. There will be plenty of time to profit once the hoopla dies down. Just ask the insiders of Microsoft.