IPOs And Emotions Make For A Dangerous Investing Mix

A company offers an initial public offering (IPO) when it decides that it needs some more capital to invest on becoming a better company.This IPO is the first offering of stock for that company to the public.(It may have offered stock to its employees before an IPO as an incentive for those employees and to make them feel like a part of the ownership.)As a publicly traded company, the leadership becomes beholden to those who own stock.Investors want to see the stock price rise, and they would love to get a dividend.

IPOs tend to have the same type of cycle across the board.The company offers the stock at a price it feels is fair.The investors who get in at the ground floor get the stock at that price.However, the IPO creates such a buzz that some investors are not able to get in at the beginning, so they buy the stock at a higher price from someone who was able to get it at the initial price.The stock price gets artificially inflated, initial investors feel like they have done a superior job, and latecomers also feel like they have gotten a good deal.
The problem occurs a couple of days to a week after the IPO when the price of the stock starts to settle.Sometimes that initial price will have still been too low and investors will look like they were smart, but for those who came late to the party, they find that the stock price falls far below what they paid for the stock, making it a bad short term investment.
When a stock is involved in a loss, it becomes the investor's responsibility to decide whether to fish or cut bait.Holding onto a stock that is now showing a loss may not be a bad thing if at some point in the future it will go higher than the investor's original investment.If the stock will never go up and the company does not pay dividends, then the stock becomes an albatross in the investor's portfolio that is costing the investor money it terms of opportunity costs.
Opportunity costs are those costs that come from the lack of opportunity to invest in the next hottest stock.By holding onto a 100 shares of stock valued at $20 a share, the investor is missing out on the opportunity to invest $2,000 in another stock that may pay a dividend or may be on the rise, but the opportunity cost is not the $2,000.It is the amount of money that the investor would have made if the money had been available to invest in a better stock.If the investor would have been able to invest that money in a stock that tripled, then the investor missed out on the opportunity to make a profit of $4,000 - that is the opportunity cost of having money tied up in a stock that isn't doing well.
Whether or not an IPO is right for the investor depends on what the investor knows about the company and the industry that company works in.It is important for investors to make logical decisions when it comes to investments.By removing the emotion and excitement from the equation, picking a stock that is worthwhile becomes easy.Unfortunately, it is that emotional tie to the company or the business model or the personality that runs the company that makes picking stocks a riskier business.A good investment advisor will be able to help you in selecting the right type of companies to select to help you create a solid retirement.