Cents and Sensibility
Cents and Sensibility
Question: Some people have told me that buying stock in a company when it's first issued is a great way to make money. Is this true? IPOs can be calculated
risk or pure chanceAnswer: One of the riskiest stock investments is an initial public offering, or IPO.
An IPO is a stock that is being offered to the public for the first time.
In many cases, the stock is issued by a newly established company, which makes the future of the stock very uncertain.
A case in point is Netscape Communications, a company that manufactures software for navigating the Internet.
When the stock was issued, it grabbed headlines across the nation.
In a single day, the stock, which was offered to institutions at $28 a share, rose to $71 per share -- one of the largest single-day gains ever recorded for a new stock.
By the end of the week, however, the stock had fallen to $58 per share. Netscape was acquired by America Online in 1999 and no longer trades as a separate stock.
Because of their risk and volatility, IPOs are unsuitable for many investors. If, however, you are interested in adding this type of investment to your portfolio, here are two tips to keep in mind:
1. Do your homework before investing any money. Request a copy of the company's prospectus, and read it carefully.
This document will provide the information you need to make an educated decision as to whether you should invest.
2. If you do invest in an IPO, invest only as much money as you can afford, both financially and psychologically, to lose.
If this sounds a bit harsh, it should. History has not been kind to new companies and the stocks they issue.
A 1997 Dunn & Bradstreet study showed that 42 percent of all businesses fail during their first five years.
Of those that survive five years, 25 percent fail after six to 10 years, and an additional 33 percent fail after 10 years.
Those seeking to achieve long-term goals, such as providing for a child's college education or securing a comfortable retirement, have achieved much more consistent results by choosing high-quality stock mutual funds and the individual stocks of well-established companies with proven track records of growth in sales, earnings and dividends than those who have chosen more aggressive stock investments such as IPOs.
In short, investing in a quality stock is a calculated risk that can offer handsome rewards. Investing in an aggressive stock that has no established history leaves your financial future largely up to chance.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com