Beyond Meat, the maker of plant-based meat substitutes like the Beyond Burger, shattered expectations when its shares jumped 163% Thursday after the company's initial public offering.
The company has caught the attention of many investors on Wall Street, as have the IPOs for other big names like Pinterest and Lyft, which listed earlier this year, and Uber, which is slated to go public later this month. But before you get swept up in the frenzy, remember: experts urge individual investors to be cautious.
It's smart to wait at least a few months after a company's public debut before investing, so that you can ride out any initial volatility, they say. Despite having what's been called the "best IPO so far in 2019," Beyond Meat will likely have growing pains at first, as have most IPOs over the past 40 years.
Here's what to consider before you invest.
'Only a handful' of IPOs 'produced extreme positive returns'
More than 60% of the over 7,000 IPOs that took place between 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 reports.
"There's such a flurry of activity right now," Arielle O'Shea, NerdWallet's investing and retirement specialist, tells CNBC Make It. "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."
What's more important? Making sure your overall financial health is strong, she says, and having a firm understanding of an individual company's business plan and long-term growth potential before buying up shares.
See whether the stock fits with your overall financial plan
Before investing in individual securities, you should make sure that you are contributing to a retirement account and have a debt-repayment plan in place, experts say.
While investing in a company garnering media attention can seem exciting, most investors are better off buying shares of low-cost index funds and ETFs. That's how investors generally build wealth over time.
To that end, if you are not contributing to a 401(k) or other workplace retirement plan, or an individual retirement account, that should be your top priority, followed by high-interest debt repayment. Investing in index funds and paying off debt will likely do more for your bottom line than snapping up a couple of shares of a trendy company.
Consider how investing in a single company fits into your overall financial plan. What are your short- and long-term goals? How do you think investing in this company will get you there?
How to buy stock
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 Beyond Meat, here's what to do.
- Research the company. Familiarize yourself with how the company actually makes money and what it has planned for the future. Read through its S-1 filing, which outlines revenue sources, when the company expects to turn a profit and other important company details.
- Open a brokerage account, a taxable account through which you can invest in individual securities, unlike a 401(k). To decide which account is best for you, read up on the best online brokerages or consider a brick-and-mortar one, like Fidelity.
- Search the company's ticker symbol and put in an order. Beyond Meat's ticker symbol is BYND.
A good rule of thumb, says O'Shea, is that individual securities should comprise no more than 5% to 10% of your portfolio.
Keep in mind that any individual stock can over- or underperform and past returns do not predict future results.
Finally, start small. Don't pour your emergency fund into a single stock, no matter how much research you've done. Be cautious — you can always invest more money in the future.
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