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Why You Shouldn't Buy IPOs and Sell Fast for That First-Day Pop

By Motley Fool Staff – May 20, 2019 at 10:58AM

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Sorry, average investor friends -- it’s less a matter of "you shouldn't," and more a matter of "you can't."

New is exciting. New is cool. And new, in the world of investing, is the company that you've heard buzz about for awhile, but haven't been able to profit from -- until it finally issues its initial public offering. And what makes these new stocks even more attractive is that it seems like they almost all go up nicely from their offering price during that first trading day.

So why, asks listener Ziv in this segment of the Motley Fool Answers mailbag episode, don't we recommend buying in on those IPOs, jumping out fast, and pocketing a quick profit? Hosts Alison Southwick and Robert Brokamp are joined by Buck Hartzell, the Fool's director of investor learning and operations, to explain why all is not as it seems in IPO Land.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on April 30, 2019.

Alison Southwick: The next question is from Ziv. "I was wondering what you have to say about investing very short term in IPOs just for the pop. It seems that big-name IPOs like Lyft almost always pop on the first day. Why not make a quick 5-15%? Am I missing something, or is this Foolish?"

Buck Hartzell: Everybody loves a quick 15%, right? Sure, we'll always take that. Ziv, a good question! Here's the problem with this. Those investment banks that underwrite the IPO reserve a certain amount of those shares, but it's usually not for you or me. It's usually their big clients. Pretty typically they get them, they sell it, and they get the pop.

What happens in a lot of cases [I went down to discount broker a year or so] when there was a big IPO coming down the pike. I said, "How's it going?" He was like, "Oh, my gosh!" He was shaking his head. He said, "People are putting in orders. They don't realize they're not going to get the IPO price, because it's priced at $22 and it opens at $28." What happens is people put in market orders. You've got to be very careful not to do that. You're not going to get the IPO price.

So Ziv, it's a good idea, but it's unlikely you're going to get that pop. I would say further for The Motley Fool, in general, you've got to remember. Insiders are selling on these IPOs now. They go on their market tour and tell everybody how great the business is and then they're selling off some shares. Oftentimes -- not every time -- but The Motley Fool likes to sit back and wait for a few quarters to see how well this company performs and that initial pop, a lot of times, will dissipate.

We did this with Facebook. Facebook came out and there was a big pop. We recommended it later and got it at a much better price. So be patient. You're probably not going to get that 15% pop.

Robert Brokamp: I'll just point out that if you're looking for an academic source on IPOs, the guy to go to is Jay Ritter at the University of Florida. Go to his website. He has tons of great information and data on IPOs.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Alison Southwick has no position in any of the stocks mentioned. Buck Hartzell has no position in any of the stocks mentioned. Robert Brokamp, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends FB. The Motley Fool has a disclosure policy.

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