Personal Finance

Lots of IPOs are hitting the market this week. Why you should invest with caution

Key Points
  • So far this year, there have been 113 initial public offerings, or IPOs.
  • The Renaissance U.S. IPO index is up about 58% in 2020.
  • If you're interested in an IPO, be sure to do your research instead of buying into the hype, experts say.
Luis Alvarez

The market for initial public offerings is partying like it's 2014.

Fourteen IPOs are scheduled to hit the public market this week, marking the most weekly since 2014, according to Renaissance Capital, which advises investors on IPOs. By planned proceeds — an anticipated $7.8 billion — this is the biggest week since May 2019 when Uber went public.

Already this year, 113 companies have raised $38.4 billion. And many have done well: The Renaissance U.S. IPO index is up roughly 58% so far this year. 

However, not every new publicly traded company remains high down the road despite a strong debut. Add in the volatility that's ruling the stock market this year, and there are reasons for investors to approach any IPO with some caution.

"With an IPO, you never know which way things are going to go, regardless of how much hype there is about any company going public," said certified financial planner Doug Boneparth, president of Bone Fide Wealth in New York. 

IPOs are a way for privately owned companies to raise money by selling shares to the public. Before a new stock issue reaches the market, investment banks, which generally underwrite the IPO, sell shares.

Typically, those pre-IPO shares are reserved for sophisticated investors or institutions with access to such deals. Those buyers may be required to hold on to the stock for a certain length of time — six months, often — before they can sell it. 

Retail investors usually have to wait for trading to start through a market like the New York Stock Exchange or Nasdaq. 

Nasdaq President Nelson Griggs on the IPO market
Nasdaq President Nelson Griggs on the IPO market

"If there's huge demand for the debuting company, you'll see the stock price pop right after opening," Boneparth said.

On the other hand, he said, if there's a lack of demand or the markets think the stock is overvalued, the share price could fall. That doesn't mean it won't go back up again, but you could be waiting a while.

For example, Facebook — which now trades above $270 — debuted in May 2012 at $38 share. By September of that year, it had dropped below $18. It took another year for it to even climb back up to its initial offering price.

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It's important to do your research on a company before blindly jumping in just because it's a newly listed stock, Boneparth said. That includes checking out its S-1 filing with the Securities and Exchange Commission to scrutinize the balance sheet and find out the potential risks of investing in the stock. (SEC Form S-1 is the initial registration form for new securities required by the SEC for public companies that are based in the U.S.)

"If you've done your due diligence, the company has strong fundamentals and you believe in the company for the long term, then it can be good to get in early," Boneparth said. "The price might be much lower today than years down the road.

"Just don't buy hype," he said. "You're buying a company."