subject: Day Trader Coach - How Can I Trade An Ipo [print this page] Considering how Facebooks fared on its debut last Friday, there could not be better time to talk about IPOs and how to trade them. In the world of finance, the term IPO slipped into everyday speech ever since the tech bull market of the late 1990s. In todays fast paced financial markets most investors, professionals or amateurs, are aware of the potential gain that the purchase of IPO stock represents. Everyone like to talk about IPOs, hot IPOs, etc but buying an IPO, especially if it is considered hot, is an arduous task for an average investor. Sadly, this facility is mainly provided to the wealthy or to those who have inside connections to the company or underwriters. However, there are a few times and ways that you can get in on an IPO.
Though the purpose of writing this article is to explain how to trade an IPO, however, for the uninitiated lets briefly go over its essential details. IPO, acronym for Initial Public Offering is a financial service that a company undertakes to raise monetary funds. As the name suggests, an IPO is the first issue of sale of companys stock into public domain, and thereafter is listed on the stock exchange for trading. After rigorous research and analysis through several investment banks or financial institutions, the company auctions a part of its share to the market at an intricately determined issue price. The proceeds are forwarded to the company for its use.
Reasons for an IPO undertaking are several, however some of the commonly known are future growth plans, debt repayment, exposure for public image, working capital and so on. Keeping that in mind, it may seem an easy approach for any company to raise money but the processes per se are very expensive and demanding. For the simple reason that it will have marketing and accounting requirements, along with regular need to disclose financial and business information quarterly. This may also be considered unfavorable for many small businesses, especially those having enormous competition. From an investors point of view, IPOs are relativelymid-term investment that has a potential to yield substantial gains with relatively low risk. It is a phase that every listed company in the world has gone through, a process where a corporation is partly made public to favorably increase its potential by the IPOs proceeds.
The foremost requirement to swing trade reports an IPO is obviously to have a trading account. As with the purchase of any stock, you will need a brokerage account to purchase an IPO as well. Because the IPO process is controlled by the companys underwriter, not all brokers can guarantee that you will be able to purchase IPO shares. So it important that you pay particular attention to which brokerage firm you sign up with. For instance, opening an account with a prestigious online brokerage firm could increase you chances of getting IPO stock, or perhaps you can use a discount broker like E-Trader who have connection with underwriters. In any case, it is always important that you ask IPO-specific questions and their availability at whichever broker you consider.
By now it should clear that underwriters or brokerage firms are biased towards high-end clients, who thereby have better chances of securing shares than an average investor. In line with that though, it may be important to be caught in your brokers radar as a frequent trader or a high-end investor. Perhaps another reason for this seemingly unfair partiality, is because IPO stocks are risky and speculative by nature. So even if the brokerage firmmanages to secure the shares, it will not allow you to trade it as long as they think the investment is not suitable for you. For assessing purposes, there are number ofcriteria that a broker may consider, for e.g. income, net worth, risk tolerance and investment objective. They may also stipulate you to have minimum cash balance in your trading account.
Lastly, however the most useful piece of practical advice in IPO day trading is to establish contacts in the financial industry. The key to allotment of IPO shares is that the underwriters, or investment banks, typically target institutional or wealthy investors who can buy large blocks of shares. Therefore if you make yourself known or be in contact with people at the highest level of the financial industry, then your chances of obtaining a few shares exponential increase. After all it is the underwriter for an IPO who decides who gets IPO shares and how many, and it is not an even distribution. However, if befriending, someone in top position, is out of scope then your best bet would be to open an account with a discount broker that has connection to the underwriters. For instance, E-Trader has assigned a special segment of its site to IPOs, which offers IPOs to individuals. However, no matter what you do, you are unlikely to secure large number of shares.
Post-purchase and after the stock has begun trading, one can employ several trading strategies to get the best out of his/her investment newsletters. Keep in mind that oftentimes there are restrictions or penalties on selling the stocks immediately after its open for trading. It is always a good idea to research the company well, before you make your decision to purchase it, so that you are not tempted to quickly sell off, or flip your shares for profit. As the bottom-line, IPOs are very popular trading instruments for they can easily multiply your investment in few trading session, but that only makes it a difficult task to obtain them in the first place. After all that if you manage to somehow secure IPO shares, coming at par or beating the street expectations can in itself be a formidable task, which can ultimately affect the price of the stock. As with any investment, consider all the pros and cons before you invest and chalk out a trading plan to get the best out of each investment.
