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IPO Risk Vs Reward…

Hey 5-Star Trader,

We are in the midst of earnings season and this week is particularly heavy with initial public offering (IPO) reports being released. This is creating a flurry of action in the market, and while this is a lucrative time to get in, IPOs are particularly volatile in nature.

What should you look out for and how do you protect yourself?

What is an IPO?

An IPO is established when a newer company transitions from a private institution to a public one. Once a company becomes an IPO, it is required to report earnings quarterly, whereas previously the company financials weren’t made public. Additionally, a company is allowed to sell shares to the public.

These shares are usually cheap which makes the barrier of entry small. This can be tempting for potential buyers. However, because of the lack of financial data, buying shares of a new IPO is also inherently risky. Until you can get more historical reporting for a company, knowing whether it will be a success or failure is more difficult to predict. 

Amazon is a good example of this. In 1997 Amazon hit the market as a new IPO with no public financial history. For years Amazon was not profitable and many people did not want to take a chance with this IPO. Fast forward to today and Amazon is now a huge corporation that has a massive influence on the overall market. If you got in early and took the chance, your investment is certainly paying off now.

Which IPOs do I favor?

Below are the key players I’m watching as they report:

  • AirBnB (ABNB) 
  • Tattooed Chef (TTCF) 
  • Honest Company (HNST)

For me, despite the risk involved, I’m willing to take a risk on IPOs because of the potential payout. However, be mindful and always adjust your risk accordingly.

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