Image-sharing platform Pinterest and videoconferencing company Zoom are two of a handful of big-name tech companies that went public or plan to go public this year. Ride-hailing app Lyft listed earlier this year, while Uber is planning its IPO for later this spring.
If you're interested in buying stock in one of these companies, experts urge caution. For starters, they suggest waiting a few months for their price to settle.
Lyft is a good case study of why it can be smart to sit out an initial public offering, Arielle O'Shea, NerdWallet's investing and retirement specialist, tells CNBC Make It. The company's shares are down around 20% since its IPO, highlighting the volatility that often follows a public offering.
"If you had waited just a few weeks, you would be buying at quite a discount, so that's a good illustration of what can happen if you act too fast," she says. "The average investor should tread carefully around an IPO."
Snap was called the "hottest tech IPO in years" in 2017, and yet in late 2018 it sank to its lowest stock price ever, dropping 40% from its IPO price of $17 per share to $4.82 per share. It currently sits around $11.
And it took Facebook a full year after it went public in 2012 to hit its IPO price again after it fell for months. Though Facebook is now one of the most successful companies in the world, that prolonged shakiness can spook investors into selling early.
A number of other hot tech stocks went public back then, too, without great results, as CNBC reported at the time: "Recent debuts from tech outfits such as Pandora Media and Groupon have ultimately turned out flat. Indeed, some professionals are warning mom and pop investors away from such offerings."
In fact, more than 60% of the 7,000-plus IPOs from 1975 to 2011 had "negative absolute returns five years following their first day of trading, and only a handful produced extreme positive returns, according to a UBS analysis using data from University of Florida professor Jay Ritter," CNBC reported.
These dips in stock prices are standard for companies making their debuts, Eric Walters, a Colorado-based certified financial planner, tells CNBC Make It. Still, the data highlights why everyday investors should probably wait 12-18 months before buying stock from a company fresh off an IPO.
Walters says there are a few reasons for this:
- Prices tend to fluctuate significantly as corporate insiders and venture capitalists sell their shares.
- The company will be working out how to operate as a publicly traded company.
- The people underwriting a company's IPO aren't necessarily interested in creating long-term value for an IPO investor; they're often interested in increasing short-term profits.
"They want to increase excitement for a stock to maximize the gain on the actual IPO," says Walters.
Additionally, Walters says, investors should wait to see if management shifts, which is common after an IPO and can influence stock price. Waiting a year to a year and a half to buy allows these pressures to die down. Plus, you can get a sense of how the company will actually operate in the long term.
Be wary of investing in a big name just because you read about it in the news, experts add. You don't want to invest in something just because of the media hype.
"There's such a flurry of activity right now," says O'Shea. "It can be exciting and it's easy to get ahead of yourself as an investor, especially with some of these names. But the recognition of a company is pretty far down on the list of things to consider before investing in a stock."
The majority of investors should not prioritize putting money into individual stocks, O'Shea says. For most people, the best way to invest is in low-cost ETFs or index funds. That's the approach Warren Buffett has advocated for retail investors.
Before diving into individual investments, you should survey your entire financial situation. Here are a few questions to ask yourself:
- Do you have an emergency fund with several months' worth of expenses saved?
- Are you contributing to a retirement account?
- How much debt do you have?
You want to have these aspects of your financial life in order first, before thinking about making an individual investment.
Consider, too, your long-term investment plan. How does investing in Pinterest or Zoom (or Lyft or Uber) fit in? You might that find after considering your overall financial health, that it doesn't make sense to invest in trendy companies right now. For example, if your goals are to pay for your kid's college tuition and retire in 30 years, you need to ask yourself how buying individual stock helps you get there.
And if you do decide to invest in individual stocks, they should comprise no more than 5% to 10% of your total portfolio, O'Shea says.
If you have all of your other financial bases covered, you understand the risks and you still want to invest in an individual company like Pinterest or Zoom, follow these steps.
- Do your homework first. Get to know the company's long-term business plan, how it makes money and how it fits into its investors' lives. You can start by reading the company's S-1 filing, which outlines revenue sources, risks, competition, when the company expects to turn a profit and more.
- Open a brokerage account, which is a taxable account through which you can invest in individual securities. This is different from other investment accounts, like a 401(k), which you typically cannot use to invest in individual companies. If you don't already have one, you can open one of these at a regular or online brokerage company like TD Ameritrade or E-Trade. To decide which account is best for you, compare fees and stock offerings. Read up on the best online brokerages or consider a brick-and-mortar one.
- Search the company's ticker symbol. Once you find the company you're looking for, you can put in an order through your brokerage account. Pinterest is listed under PINS, for example, and Zoom is listed under ZM.
Remember, it's in your best interest to start small. You can always buy more over time if you decide it's a good investment.
Disclosure: CNBC parent NBCUniversal is an investor in Snap.
Correction: This story has been updated to reflect the correct ticker symbol for Zoom.
Like this story? Subscribe to CNBC Make It on YouTube!