Personal Finance

Saudi Aramco IPO is latest example of why it's best to wait to invest in newly public companies

Key Points
  • Saudi Aramco, a petroleum and natural gas company, is the latest big name to tap the public markets this year.
  • While the listing set new records, the deal is also mostly closed to new investors. However, you shouldn't be disappointed, experts say.
  • That's because it's always best to wait and see how a company does, and take a gradual approach to adding a new investment, rather than taking big gambles right away.
A sign of Saudi Aramco's initial public offering (IPO) is seen during a news conference by the state oil company at the Plaza Conference Center in Dhahran, Saudi Arabia November 3, 2019.
Hamad I Mohammed | Reuters

Saudi Aramco set new records as the world's biggest initial public offering. And, chances are, you're shut out from getting a stake in Saudi Arabia's state-owned oil company.

That's actually good news, according to experts.

It has been a big year for companies, including household name brands such as Uber, Lyft and Pinterest, to tap the public markets for funding. However, for individual investors, it's still better to wait before risking your money on them.

IPOs allow private companies to raise money by selling shares publicly. The companies typically list on the public markets, often the New York Stock Exchange or Nasdaq, giving public investors the ability to own those stocks. The company's existing private investors, meanwhile, often have access to preferential shares.

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Saudi Aramco climbed to a $2 trillion valuation on its second day of trading on Thursday.

Admittedly, Saudi Aramco is a one-of-a-kind deal.

For starters, the company is only traded on the Saudi Stock Exchange, also known as Tadawul.

"You have to have a certain amount of assets to participate in the foreign exchange, so it's not open to all investors," said Kathleen Smith, principal and manager of IPO ETFs at Renaissance Capital.

The deal is also structured so that Saudi citizens get extra shares if they stay invested in the company for six months.

Consequently, even institutional investors want to wait until that six-month mark when the stock trades more freely, Smith said.

There's another reason individual investors might want to wait.

That would be until the company is listed on other international exchanges, which would require the energy giant to file more disclosures than it has on the Tadawul exchange. That development could be at least a year away, Smith said.

"You're better off buying another oil and gas energy company that have much higher yields and are more transparent," Smith said.

Some funds, particularly sovereign wealth funds, could own the company, Smith said.

VIDEO5:5705:57
Bill.com CEO Rene Lacerte on the company's public debut

Renaissance Capital's ETFs, which hold companies that have recently gone public, won't be included. That's because Tadawul doesn't qualify as an open exchange, according to the firm's standards.

Instead, Renaissance Capital is watching Bill.com, a venture capital backed "unicorn," valued at more than $1 billion. The back office automation software company began trading on the New York Stock Exchange on Thursday.

Bill.com's IPO priced at $22 per share, and was trading at above $35 per share on its opening day.

If you are tempted to put money to work in a newly public company, there are a few things you should keep in mind.

It's OK to wait

It may not be easy to get in on an IPO deal early.

That's because to participate, you often have to have an account at a brokerage firm that is participating in the offering, says Barry Glassman, founder and president of Glassman Wealth Services, with offices in Vienna, Virginia, and North Bethesda, Maryland.

The deal's availability may also be limited by how many shares are actually going public and how much demand there is for the offering, said Glassman, a certified financial planner.

Too often, people get very excited about a product, and a great product does not necessarily mean a great stock.
JJ Kinahan
chief market strategist at TD Ameritrade

Investors who are interested in an IPO can start by checking with the financial institutions with which they're currently affiliated to see if they can get in.

But those same investors would be wise not to rush, according to JJ Kinahan, chief market strategist at TD Ameritrade.

"You don't have to be the first one to the party," Kinahan said. "Too often, people get very excited about a product, and a great product does not necessarily mean a great stock."

Limit your risks

Whether you invest in an IPO or not should first be determined by whether it makes sense for you personally before you consider the particular investment's risks.

Start by asking yourself: What's my timeframe?

VIDEO0:4700:47
How an IPO works

"If you're in just for some quick flip, that's a very risky type of investing behavior," Kinahan said. "There's a reason that it often doesn't work out really well, because it's hard."

If you do plan to hold onto the stock longer, it's also important to keep in mind that you don't necessarily want to wager your safe investments — the funds you will rely on in retirement — on a risky bet.

Do your research

Once you're convinced you are able and willing to take on the risk personally, it's important to assess the particular investment's risks.

In order to really know what you're getting into, investors should study a company's disclosures, such as the Form S-1 filing with the SEC. Companies that are listing in the U.S. are required to file that disclosure, which outlines all the potential risks of investing in their business.

Another way investors can also protect themselves: avoiding an all-or-nothing mentality, according to Kinahan.

"If you have 300 shares to buy, maybe you buy 100 to start," Kinahan said. Having a partial mentality can help investors avoid panicked transactions both on the way in and out of an investment, he said.