IPOs - Speak The Basics (Very Good Reading) (21)

Patience is a virtue


If you can't get in on an IPO at the offering price, what's the next best time to invest?

Analysts have differing opinions on this, but most agree on one point:


You must be patient.



It may be incredibly exciting to watch a stock like Netscape or theglobe.com soar on the first day of trading,

but it's a potentially dangerous way to invest, especially if you're planning to be in for the long term.


When a stock first starts trading, its price will nearly always rise to an artificially high level.

First of all, investor demand is often unusually heavy because of the hype surrounding an IPO and the strong selling effort employed by the syndicate


In addition, the lead underwriter is legally allowed to support the stock price of a newly public company, either by buying shares in the open market or by imposing harsh penalty bids on brokers who return shares in a new issue.


While this early momentum can last for several days or longer, it ALWAYS ends, at least temporarily. "Within three months or four months the stock price (of an IPO) will usually sag," said Kathy Smith, an analyst at the Greenwich, Connecticut-based Renaissance Capital, an IPO research firm that manages the IPO Fund.


"A wait-and-see approach can really pay off."


For example, Amazon.com's stock gained a bunch on its first day of trading but it was actually trading at less than its offering price a week later.

Amazon's a bit of an unusual case, but most new issues will show some significant price weakness within the first six months of trading.