An Initial Public Offering (IPO) is when a private company decides to offer shares to the public for the first time. For the purpose of raising more capital and paying off debt. There are more reasons, of course, but these are usually the most common.
When a company goes public, the buzz is hard to ignore. It becomes the talk for all media platforms. You get the feeling that everyone is rushing to buy in early, hoping to catch the next big thing, such as Google, Amazon, and Facebook, just to mention a few.
In this post I’ll tell you my experience so far and you can decide if you should invest in IPOs or not.
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Why invest in an IPO?
If you’ve been following my journey, you know I focus heavily on dividend stocks. That said, I don’t completely ignore non-dividend companies or IPOs, especially when it’s a business I’m already familiar with.
Let’s be real: it takes a lot of commitment and energy not to get swept up in all the excitement. Can we call it FOMO (fear of missing out)? Eh… maybe just a little!
If you have a long-term horizon, have done your research, and are using money that won’t impact your financial health if things go south, then contributing a set amount periodically could be a smart way to approach it.
For example, Palantir was one company I had no clue about at first, so I didn’t want to just jump on the hype wagon without doing my homework. After some research, I learned it was a software company specializing in complex data solutions, offering real-time insights, with no debt and very few real competitors. That was enough to convince me to give it a shot back in 2021 — and I’ve been contributing ever since.
My average cost is around $15, and as of this post, it’s trading at $112. This just goes to show that investing in IPOs can be profitable but it doesn’t change the fact that the price can drop at any time.
Is there risk in investing in an IPO?
Absolutely.
The ideal scenario is getting in early and riding a wave of success, but it doesn’t always work out that way. In fact, studies show that most IPOs aren’t profitable over the long term. They can be extremely volatile, and without a strong foundation, it’s easy to get swept up in the hype and end up holding the bag once the excitement fades.
For example, Faraday Future Intelligent Electric (FFIE) is a company in the electric vehicle (EV) space. I first heard about it last year when I noticed that Palantir owned a 9% stake. Since I had been looking to diversify my portfolio with some EV stocks, I thought, “Why not?” and jumped in without doing much research.
What I didn’t know at the time was how and why Palantir owned that 9% stake.
Because of my lack of due diligence, I wasn’t aware that Faraday was facing major production and financial struggles. Had I taken the time to dig deeper, I would have made a different decision. Honestly, all I had to do was zoom out on chart and that would’ve been enough.
That experience was a clear reminder of why it’s so important to research thoroughly and not take things at face value.
My average cost is $2, and now the stock is barely holding above the $1 mark — definitely in penny stock territory. At this point, I plan to sell my position if I can at least break even.
Where should you invest?
My strategy has evolved over time. Now, I focus on investing in companies that I believe will still be strong a decade from now and, ideally, reward shareholders with dividends along the way.
For the long term, I consistently invest in exchange-traded funds (ETFs), which provide broad market exposure and stability. Some of my go-to ETFs include, but are not limited to:
- Invesco QQQ (QQQ)
- Vanguard S&P 500 ETF (VOO)
- Vanguard Total Stock Market ETF (VTI)
- SPDR S&P 500 ETF (SPY)
And most importantly, never forget to invest in yourself.
The best investment you can ever make is in yourself. Keep learning new skills and have an open mindset. That being said, look for credible resources, stay curious, and learn from those who have walked the path and have the receipts to back it up.
Bottom Line
We all work hard for every dollar we earn, so take it from experience: don’t get caught up in the hype.
When a company announces it’s going public, it’s tempting to rush in, but take a step back, do your research, and give it some time before you invest.
Most IPOs shoot up fast, only to crash just as quickly once the excitement fades. It happens more often than not.
This isn’t to say every IPO should be avoided but the odds are stacked against you.
Do you think IPOs are worth the risk or better left alone?
Gio founded TheGrowthFocusedGuy in January 2020 because he was fed up with debt.
His mission is to document his journey to Financial Independence in order to motivate and inspire others to get out of debt and begin building generational wealth.
