(Click for video linked to a searchable transcript of this Mad Money segment)
If an investment presented a potential gain of 30% or more in one day, should you take a chance and go for it?
Lots of people do it all the time, said Jim Cramer. IPOs can present that kind of reward.
"If you nail it, if you get in on the right one, you can have gains of 20%, 30%, even 100% in a day. The immediate nature of these profits makes them incredibly attractive," said Cramer.
However whenever there's high reward in the market, you can bet there's also high risk.
"The potential of big gains can easily get in the way of your better judgment," Cramer added.
Cramer cited the action in Groupon which priced in 2011 and rose 31% on its first day of trading. The promise of sharp gains attracted all too many unsuspecting investors.
"Whatever you do, don't buy the new IPO right after it has started trading. I've got staggering statistics that show you are almost a sure loser if you buy a hot stock in the market right after it IPO's."
Groupon bears out the thesis. Since the IPO shares of Groupon have marched steadily lower with the stock down 70% in the year over year period.
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"Separating the IPO wheat from the chaff isn't about luck, it's about analysis," said Cramer. And that's the key to investing in an IPO, he said.
Had investors done homework, they would have seen that fundamentals didn't support the 30% gain – they would have seen business was facing headwinds. By May 2012, Groupon admitted to 'material weakness' and waning demand for its coupon deals.
You must do homework," Cramer insisted, "You must identify fundamental catalysts that can drive business and by proxy, drive shares," he said. That's the reason to invest in an IPO, not the promise of 30% gains in a single day.
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