Even though the breadth and quality of initial public offerings (IPOs) has changed for the better, investing in new issues still can be risky so you should proceed with care. IPOs seem to fit in between venture capital and stocks with a long trading history, when it comes to risks and potential rewards. Offerings that go public aren’t as risky as venture capital because the companies have more of a track record but IPOs are riskier than companies that have been publicly-traded (and analyzed) for years. It may follow, then, that IPOs also have less reward potential than venture capital entries but more upside than long-traded companies.
One study identified fast-growing, profitable companies whose stock prices rose at least 300 percent from their 1998 highs to their 2000 highs. Of the 162 stocks that qualified, over one-third (61) had IPOs in 1995 or later. While all 162 stocks on the list gained an average of 650 percent, from 1998 peak price to 2000 peak price, the 61 recent issues led the way, averaging 677 percent. Therefore, attractive IPOs might be top performers in the next bull market.
