Investors are always on the prowl for stocks with potential for outsized profits--so when a company decides takes its shares public, you better believe they start salivating.
Initial Price Offerings, or IPOs, can grow quickly and dramatically -- this year, they've seen gains averaging a whopping 24.5%.
But caveat emptor: While some IPOs may soar, there's no guarantee that others won't sink.
Generally, underwriters price IPOs below their actual market value. So they tend to see a significant uptick as soon as they're issued, producing an easy, tidy profit for their initial shareholders.
But when insiders use IPOs as exit strategies, there's a strong incentive to make the numbers as attractive as possible -- so they'll sometimes resort to accounting tricks as a means of raising their earnings.
Problem is, the boost is only temporary, and when the insiders' lock-up period ends, share prices will retreat. Case in point: electric vehicle producer Tesla, which saw a 10% drop the day after the lock-up expired.
The moral of the story? IPOs can be profitable, but they also come with their fair share of risk.
So if you choose to invest in them, be sure to do so wisely. If you're looking for IPOs to include on your watchlist, here's an overview of the best and worst performing IPOs over the last year. (Click here to access free, interactive tools to analyze this list.)
Best Performing IPOs
3. JinkoSolar Holding
5. Graham Packaging
Worst Performing IPOs
1. Mecox Lane Limited
*Please note: Investing in IPOs is an extremely risky strategy. The volatility of these investments can be extreme -- so only analyze these companies if you believe you have an above-average tolerance for risk and investment losses.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen does not own shares of any companies mentioned.