One of the worst things an investor can do is to get caught up in the glitz of an IPO.
Or, the idea that an IPO will make them rich beyond their wildest dreams. Sure, some IPOs may do quite well out of the gate. But that’s not always the case.
When Twitter had its IPO, it was over-subscribed and over-hyped, for example.
Without a profit, it hit the market at 70x sales with a wild $35 billion market cap. But that didn't stop investors from crowding the stock out of the gate, though. After being priced at $26 the night before, the stock began trading at $45.10 a share before jumping to $50.09. Investors chased it, only to watch Twitter close the day at $44.90 – 73% above the IPO price.
It would plummet to less than $15 not long after. Millions were lost to the glitz of the IPO.
What should have stopped investors from buying on the first day was the fact it traded at 70x sales with no profits to show or forecast at the time.
Unfortunately, they got caught up in the glitz and glamour of Twitter – and lost.
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One way to avoid such a catastrophe, though, is to do your due diligence.
Take a look at Airbnb Inc., for example.
Airbnb is a home rental platform based in San Francisco that lets people list, find, and rent short-term lodging in 65,000 cities and more than 191 countries across the globe.
While that may not sound exciting, consider this. The company just posted its second straight year of profitability, as it nears a potential IPO. Better yet, the company expects to reach 500 million guest arrivals by the end of March 2019 since its founding in 2008.
By the way, that’s 100 million new guest arrivals since September 2018. That tells us there’s solid growth afoot that could become quite a profitable investment for smart investors. Also, the company noted it recognized more than $1 billion in revenue just in the third quarter.
A second way to trade an IPO is to not buy an IPO at all.
It doesn’t matter how profitable and exciting the future looks for Airbnb. There is no such thing as a sure thing with an IPO. One way to keep your sanity and keep your money safe regardless of what happens is to buy the First Trust IPO Index Fund (FPX) allows you to do just that.
The FPX tracks hot IPOs in their first 1,000 days of trading. By buying it, not only can you avoid paying gobs of money for IPOs that may or may not work out, but you’re also being exposed to multiple hot IPOs at the same time at lesser cost.
Plus, as you can see, the FPX never once took a hit on any of the failed IPOs either.
In fact, even with some of the most obnoxious IPO failures, the ETF managed to run from a 2009 low of around $11 to a recent high of $75. It’s a safer alternative than risking your hard-earned money to another potential flop. With the FPX, it doesn’t matter if the stock is hot or a dud, the excitement surrounding IPOs continues to send the FPX to new highs.
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