It really is amazing when you see how excited people get when a hot IPO (initial public offering) is scheduled to be released. All of the hype and media attention seems to get people giddy about buying a company that usually does not even earn a profit. Think about it, a company usually comes public in order to raise capital. They will then use the money they raise to grow the business and ultimately make a profit in the future. Sure, there are many successful IPOs throughout the years, but there are also many failed IPOs as well. As a trader, all we need to do is understand the game and keep the odds in our favor. Let’s take a look at how we can do that regarding IPO’s…
This year was hot for IPOs. Companies such as Uber (UBER), Lyft (LYFT), Beyond Meat (BYND), Pinterest (PINS), Slack (WORK), Zoom (ZM), Crowdstrike Holdings (CRWD), Peloton (PTON) and others started traded. Many of these stocks are actually trading below their IPO price. To any smart technical trader, one who reads the price performance of a stock for the purpose of locating the best entry and exit points; it is very difficult to trade a stock that does not have a long history. There simply is no past chart data to work off of to discover a proper price for the equity. Therefore, if you buy stocks in this manner, you are simply hoping for it to trade higher. The last time I checked, hope was not a good strategy for finding winning stocks. (That was me being subtle, there is no room for “hope” in trading and investing as “buy and hope” is a failing strategy).
Personally, I cannot trade a stock that has not been around for at least a year. Typically, I prefer to trade in stocks that have at least a five year history in the public market. I once read that Warren Buffett does not participate in the IPO market and that should be noted by most traders and investors. Now some people might have that gambling bone in their body and enjoy the rush of participating in an IPO. I’m not a gambler, I’m a trader. The difference is that the SMART trader has the odds in his favor, while the gambler does not.
For those junkies who need the IPO action, here is one quick tip that many traders should remember: if the IPO is easy to get into, that is typically a clear sign that it is going to be a flop and likely sell off after it begins trading. I have seen this happen so many times.
Here’s the moral of the story, I will say it again, smart traders seek to keep the odds in their favor on every trade they take, so how can you expect to do that when trading most stock IPO’s? (you can’t). Consider that and beware of trading recent IPOs.
Bullseye Trading has logged in 16 consecutive winning trades since it began on September 2, 2019. The performance is verified and you can see every trade right here: Check it out here.