By Brenda Kelly, Chief Market Strategist at IG
Following a recent surge of floatations in London and New York, it is clear that we are now witnessing the best year for new stock offerings since the financial crisis set in, back in 2007. The opportunity to jump onto the IPO wave marks an exciting time for many, but it isn’t always easy to spot those upcoming IPOs that are worth investing in.
Expert Tips for Evaluating IPOs
Brenda Kelly, Chief Market Strategist at UK broker IG shares her top tips on what to look for when evaluating an IPO.
- Leave your emotions at the door
Importance of Thorough IPO Research
First things first, this is business. Successfully investing in an IPO requires a large amount of primary and secondary research where you will uncover a number of valuable business truths. Be very wary if you find your commitment to a company remains resolute, even despite your new knowledge. It is important to avoid being swept up by your emotional connection to a brand.
- Don’t believe the hype
Brenda Kelly
It is only natural to get caught up in the excitement of an IPO, especially when familiar brands are on the table. The recent surge in floatations has certainly brought with it an intensified interest from both the media and the general public, making it more important than ever to look beyond the hype.
- Observe the crowd
Using Grey Markets to Gauge Sentiment
Grey markets have fast proven themselves as a way of anticipating future trends, by drawing upon the diverse experience and knowledge of a large audience (all with plenty to potentially gain). Grey markets we ran last year on both the Royal Mail and Twitter IPOs were more accurate in predicting prices than bankers and their advisers. By their nature they ebb and flow until a general consensus is made, making them a valuable tool to consider when investing.
- Location location location
Key Factors to Analyze Before Investing
Think carefully about where the company in question is being listed. Different exchanges can have different rules and (obviously) timings. Understanding the nuances of each is important. We are in a particularly busy time for traders with the US reporting season firmly upon us, something that has highlighted the importance of extended hours trading. Whether investing in a company ahead of quarterly results or an IPO, having as much trading access as possible is key.
- Develop a trading style that suits you
Short-Term Versus Long-Term Strategies
The answer to whether you should invest in an IPO for short-term or long-term gains depends entirely upon your investment goals and strategy. Widespread market optimism often helps to create short term opportunities for investors. By their very nature IPOs often encourage a short term perspective but don’t forget to consider the longer term future of a company when deciding on how long to hold onto stock.
- Observe the competitor landscape
Make sure you examine what a company’s competitors are doing before opting in on trading day. Are their share prices rising or falling? How does the wider marketplace look? What if a company’s bigger rival decides to IPO at the same time? By analysing the competitor landscape it is possible to spot anything that could undermine the enthusiasm for your company’s IPO.
- Be prepared to react quickly on IPO day
Having considered all options, it is important to remember that nothing is certain when investing in an IPO and having the ability to react quickly is paramount. Even high key IPOs like Facebook can go wrong, as Facebook unveiled to the world when it experiences technical issues on the NASDAQ. Being prepared to react to market conditions on the day is important.
