It's easy to understand the appealof an initial public offering (IPO).You feel as if you're getting in onthe ground floor and rubbingshoulders with the big boys. But whenyou carve away the glitz and glamour,will you find that there's real substancebehind an IPO?
According to a recent report, more than 5000 companieswent public between 1989 and2000. Today, more than one third ofthose companies that are still in businessare down 50% since their stockmarket debut. In addition, only onefifth of those companies have actuallyseen the price of their stock doublesince opening day.
Google's IPO Lesson
Not long ago, Google Inc announcedits plans to go public.Interested investors would register andsubmit a bid prior to the stock's launch.This unconventional process, it wasbelieved, would safeguard against individualinvestors being closed out of theIPO process. But according to a article, there were stillseveral roadblocks.
First, Google announced that itexpected its shares to sell for between$108 and $135. That alone, says JohnMarkese, president of the AmericanAssociation of Individual Investors, was"a stay-away-from-this-IPO sign" forindividual investors. Second, eventhough the minimum number of sharesthat could be purchased by an investorwas five, most brokerage firms require aminimum balance of $100,000.
In the end, Google wound up dramaticallylowering its price to $85 ashare. According to Andrew M.Schroepfer, president of Tier l Research,the company did so because the marketplacesent a firm signal to the companythat it needed to prove itself first.
According to the article,investors are better off waiting 6 monthsafter an IPO to make a move. Generally,a company's lockup period has ended bythen and insiders are able to sell additionalshares, which frequently drivesdown the stock's share price. Thus, thosewho invest after the IPO launch have justas good a shot at making money.
Investors interested in getting in onthe ground floor should consider thecase of Google. In the initial documentthat Google filed with the SEC, thecompany noted it expected to be worthbetween $29 billion and $36 billion theday it went public. According to thearticle, that would mean Googlehad a greater market value than FordMotor, Starbucks, Federal Express, andLockheed Martin.