The IPOs for Airbnb and DoorDash have skyrocketed this week. Nonetheless, make investments with warning
The Airbnb logo will appear on the Nasdaq digital billboard in Times Square in New York on December 10, 2020.
I have Betancur | AFP | Getty Images
Even amid a pandemic, many popular companies have gone public to give investors the opportunity to buy their stocks.
But getting in early may not be the best strategy.
Two major initial public offerings (IPOs) hit the market this week with strong performances on the first day of trading. On Wednesday, DoorDash closed 85% on its trading debut, and Airbnb rose 112% on day one as a public company on Thursday.
The IPOs were buzzing this year amid the market’s epic rebound from the coronavirus-fueled escape in March. According to Renaissance Capital, which advises investors on initial public offerings, 203 IPOs have raised $ 74.9 billion so far this year.
And many have done well. The Renaissance US IPO Index was up more than 113% by Thursday’s close.
Although the IPOs have had a solid year, investors should still proceed with caution, according to financial experts. The stock market has been choppy for the past few months, and not every newly listed company continues to climb after a strong debut.
“People should be careful about IPOs as they tend to be overpriced by the time they are available to the public,” said certified financial planner and CPA Anjali Jariwala, founder of Fit Advisors. “As with any investment, you should exercise caution and avoid the media hype.”
IPOs are a way for privately held companies to raise money by selling shares to the public. Before a new stock offering goes on the market, investment banks that generally subscribe to the IPO sell stocks.
As a rule, before the IPO, these shares are reserved for discerning investors or institutions that have access to such transactions. These buyers may have to hold onto the stock for a period of time – often six months – before they can sell it.
Retail investors usually have to wait for them to start trading on a market like the New York Stock Exchange or Nasdaq, which means they are already set to make less than previous investors.
If there is demand for the newly listed company, the share price will go up right after it opens. It did so with Beyond Meat, which soared more than 163% on its highly anticipated trading debut in 2019.
On the flip side, stocks could fall if there is a lack of demand or if the markets believe the company is overvalued. Uber slumped more than 7% on the first day of trading last year.
If a stock falls on or shortly after its trading debut, it does not mean it will not go back up. But you could wait a while.
For example, Facebook – which is now trading above $ 275 – debuted at $ 38 in May 2012. By September this year it had fallen below $ 18. It took another year before the original offer price was reached again.
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It’s important that you do your research on any company before blindly diving into just because it’s a newly listed stock, said Doug Boneparth, CFP and president of Bone Fide Wealth in New York.
This includes reviewing the S-1 filing with the Securities and Exchange Commission to review the balance sheet and determine the potential risks of investing in the stock. (The SEC Form S-1 is the initial registration form for new securities required by the SEC for public companies located in the United States.)
“Once you’ve done your due diligence, the company has solid fundamentals, and you have long-term belief in the company, it can be good to get started early,” said Boneparth. “The price could be much lower today than in the next few years.
“Just don’t buy hype,” he said. “You’re buying a company.”