Initial public offerings have always been popular among investors, as they offer the chance for some amazing and quick gains. Yet after the Facebook (NASDAQ:FB) IPO, many investors swore off initial public offerings forever, seeing them as a rigged game that they couldn't win. Now, some new and successful IPOs have those investors wondering what they should do next.
In the following video, Dan Caplinger, the Fool's director of investment planning, looks at three lessons that you can take from the IPO market. First, Dan notes that you can't count on the big gains many expect from IPOs. Facebook is the obvious example, with lots of hype before the initial public offering building high expectations that the company couldn't deliver on for more than a year after the shares went public. Some companies never recover from their IPOs. For instance, Zynga (NASDAQ:ZNGA) trades well below its IPO price and is still struggling to find a viable business model in a rapidly evolving and highly competitive industry.
Second, Dan observes that you also can't count on being able to get in on a stock at cheaper prices after its initial public offering. Google (NASDAQ:GOOGL) and MasterCard (NYSE:MA) are two examples Dan mentions, with Google having jumped just about from its outset because of its immense popularity and its success in growing its profits quickly. Similarly, MasterCard managed to stay above its IPO price even in the midst of the financial crisis, largely because its card-network model didn't involve the credit risk that other financial companies took on.
Finally, Dan reminds investors that you can't expect to be 100% sure about any company going public, as most IPOs involve new and untested businesses. By the time you're comfortable with a company, it has often already produced huge gains that you've missed out on.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Facebook, Google, and MasterCard. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.