The Scoop on IPOs
Initial public offerings can generate some spectacular returns — as high as 20 percent, 30 percent and 50 percent in a day — which makes them a great way to get back to even. That’s why Cramer addressed the topic on Friday's "Mad Money."
The thing is, there are a lot of details that investors need to know about IPOsbefore they buy them. Sure, there are the basics: Not everyone one is worth consideration, and these deals aren’t about luck. But did you also know that underwriters often underprice an offering just to attract interest?
It’s true. There are times when retail investors are sitting on the sidelines, and the underwriters try to draw them in. Why? Not only to help the soon-to-be-public company raise money, but also to keep their other clients, those who trade stocks, interested in the market. Because when the clients are buying and selling, the underwriters, who offer brokerage services as well, are making money on those transactions, too. So a well-priced IPO serves to get them back in the game.
One thing investors should never do, though, Cramer said, is buy in the aftermarket, which is buying an IPO’d stock once it’s available to the public. If you can’t get in the deal, forget about it. Otherwise you’ll just end up overpaying.
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(Written by Tom Brennan; Edited by Drew Sandholm)
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