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Initial Public Offerings

Q: Every time I see a company go public, the stock value seems to skyrocket. How can I find out about a company's initial public offering, so I can wake up early that morning? -- W.B., via the Internet

A: Though getting in early on a high-flying initial public offering (IPO) sounds like it's straight out of the get-rich-quick fairy godmother handbook, it might be better not to set your alarm too early on a stock's first trading day. Our advice -- don't cheat yourself out of some extra ZZZs to get in too quickly on a company you don't fully understand. More often than you'd think, the IPO dream can turn into a nightmare.

An IPO takes place when a private company decides to allow outside investors to own part of the business. The IPO process takes months. Investment firms are hired by the company to determine an initial price for the shares to be issued and to find buyers for the shares. Once the price is set, brokers start taking orders for stock. They may get many more or many fewer orders than the number of shares of stock to be issued; however, the number of shares to be issued, by law, must be set well in advance. Shares in an IPO are not issued on a first-come, first-served basis -- they are usually issued to wealthy clients that the broker hopes will prove useful in the future. For "hot" IPOs, individual investors have to wait until the first day the stock is publicly traded on the open market.

What's often missed in the IPO bonanza, though, is that many new offerings make bad investments. For every highflier that doubles on the first day of trading, there are a dozen other new issues that struggle to stay above their offering prices.

Getting up early to make a purchase in the first hour of the first day of trading could guarantee a bad day, or even a couple of bad years. Three years ago, Pixar Animation Studios, the film animation company that made Toy Story( and the recent A Bug's Life, had its IPO during the week following the release of Toy Story. Investors who received shares at the IPO stage got in at a price of $22 a share. On the first day of trading, though, the lowest price available to the rest of us was $38 a share.

Were investors who woke up early well-served for missing out on their rapid eye movements? Pixar shares were trading at $25 within a week, and sank to $12 within a year. It took more than two years and the recent smash release of A Bug's Life for Pixar shares to return to the price at which they traded on their first day.

The lesson is there's plenty of time to find good companies -- and sometimes it really is best to hit the snooze button.

Action Item: Looking for more info about the Great Late '98 Internet IPO Boom? Check out our Nov. 30 article Hope Springs Internet.

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