IPO Investing – An interview with Marcus New, CEO, InvestX

Q: When should you sell IPO stocks?

An investor should consider the reasons they purchased the investment in the first place as the basis for when they want to sell.  IPO stocks traditionally don’t have a lot of downside pressure since the underwriter has a lock up for lower priced shares and the float is typically limited for the first few months to the investors on the IPO.

If retail investors have participated in an IPO, we recommend considering investor and employee lockups, liquidity, and other key provisions before selling IPO shares.  Oftentimes the returns of the investment accrue to those willing to buy and hold through the post IPO period.

Q: How does institutional investor participation in IPOs impact retail investor participation?

Very few IPO shares of top issues go directly to retail, it is first given to institutional investors. So in reality, it impacts them a lot.  Retail typically has to buy once the stock starts trading.   Retail drives a lot of momentum for trading and liquidity.

Unlike the IPO market in the past, Institutional Investors are crowding out Retail Investors, preventing them from investing until the security is publicly traded.  In the past, retail investors could receive an allotment through their broker, however, this is less common today as IPO stocks are reserved for the best and largest customers.

Q: One of the risks in IPOs is maintaining its offer price. What are the consequences of the company’s valuation changing?

In an IPO, changing valuation is an indication of IPO investor demand for the security – the effects can be felt during the run up to the IPO or after the start of trading.  The key consideration is your assessment of fair value vs consensus and the margin of safety you have baked into your purchase price.

Q: For retail investors looking to get in early, how can they evaluate companies in the IPO stage?

In the IPO stage there is a S-1 disclosure document so they have the same information as institutional investors they just can’t get in until the shares are listed on the public exchange.   InvestX helps investors get access to pre-ipo shares, leveling the playing field!