The Sweet and Sour of IPOs

Something interesting happened in late November -- the stock of Goldman Sachs (NYSE:GS) dipped below the price at which it debuted on the open market in 1999, its initial public offering (IPO) price of $53. Don't get all alarmed, though. The stock has since recovered to more than $75, well above its IPO price, but still well below where it was a little more than a year ago, trading in the mid-$200s.

The price dip got me thinking about how we warn people about investing in IPOs. You can read a lot about them in these Motley Fool articles:

• How IPOs Work
• IPO Pricing
• How to Spot the Next Hot IPO
• How to Find Value in Busted IPOs

What do we warn about? Well, many times a company that's opening up to public investment doesn't have much of a track record. If you bought shares, you'd be doing so in a more speculative fashion than with a company that sported several years of growing revenue and earnings. That's why IPOs of well-known names can be more appealing. But even they offer no guarantee of riches.

Here are some companies that debuted in the past several years:

Data: Yahoo! Finance.

Notice that only two of them have risen above their opening prices, and only one has generated 100%-plus returns for early investors.

Lessons to learn
Getting in early is no surefire path to riches. It's usually best to wait until the dust settles and you have enough information to be very confident in the company's future.

With most IPOs, many privileged people get shares priced well below the opening price, and then quickly sell them, making a speedy profit, but also putting downward pressure on the stock. Also, many insiders hold stock but aren't allowed to sell for several months. Once that time comes, many may sell, further depressing the stock.

So don't be in a hurry to buy into IPOs. You may well get a better price later, even after the company has started to prove itself.