When a company first comes to the market in its initial public offering, it can generate a great deal of interest from investors, making it an attractive time to invest, but in general, the question arises whether it is safe to invest in a company at IPO will depend on the perception of its market value.
Typically, the IPO is the only time at which the share value of a business is fixed. A business has to go through a number of steps prior to IPO to establish its long term security, and the launch price of the stock will be determined by economists and accountants in order to strike the best balance between the amount of money the business needs to raise, and its actual value, which relates to its assets and profit forecasts.
Because the market does not set the price of an IPO, it is a price that is subject to enormous fluctuations as soon as the shares go on sale. Depending on whether investors decide that a company is worth putting their money into or not will determine the direction that the share price takes over the first few periods of trading.
If a business is seen as a good risk, then the share price will rise above the IPO valuation as investors are drawn in, while if it is seen as being overpriced, then the value will fall as the stockholders are forced to lower their prices in order to sell their stock.
It can be difficult to gauge whether a business will rise or fall in value at its IPO, although there are a number of indicators in the period running up to the date that can give you an excellent insight into whether or not to get in early.
In the case of large businesses, their IPO will be a high profile event, which will inevitably attract a large number of institutional fund managers as well as smaller private investors to put their money into the business, and prices will tend to follow an upward trend in the first few sessions as the market value is adjusted to meet the interests of the market forces.
The performance of smaller companies at IPO is much more difficult to predict. If they are seen as being a well run and profitable business in a growth area such as telecommunications or technology, then they will generally rise in value for the first few sessions, in which case it is essential to get in early in order to get the best price and take advantage of the initial rises, whereas, a business that is seen as being in a static industry with long term potential, but short term difficulties, it is advisable to wait for the price to fall before putting your money in to avoid the initial drop in value.
On the whole, provided you are able to adopt a flexible and fluid approach to investment, and can put money in at a time that suits you, as well as having the ability to get out at the right time, investing in an IPO need not be a high risk move, and can offer significant rewards, however, this requires the ability to see beyond the marketing and recognise potential for growth and losses, as well as doing the research to back up your decision making process.