| 2019 has had its share of IPO hits and misses. What to think about before you invest | | |  | WED, NOV 20, 2019 | | | | Do you suffer from fear of missing out when you hear about a fortune-making potential from an initial public offering? Does this news leave you wondering if you should invest in an IPO? Well, you are not alone.
Like any other investment opportunity, there are risks and rewards with an IPO. So, the average investor should tread lightly and weigh the pros and cons before investing in one. While an IPO may sound like a great opportunity, it may not be your best bet.
The late and legendary investor Benjamin Graham, who was Warren Buffett's investing mentor, decried IPOs as being for neither the faint of heart nor the inexperienced.
The bottom line is that it can be difficult for individual investors to get in on the "ground floor" of an IPO because initial shares are allocated to mutual funds, hedge funds, pension funds, insurance companies and high-net-worth individuals. By the time the everyday investors have a chance to purchase shares, they're typically found on the secondary market, and they have already traded. This means the price may have significantly fluctuated, the Securities and Exchange Commission warns.
Of course, there are also plenty of potential benefits. Many investors have become very wealthy by investing in IPOs. Some of today's most valuable companies have seen their stock value skyrocket since going public; it does happen. If an investor sees long-term potential and believes the company is going to perform well in the future, it may be cheaper to buy shares early on.
To be sure, investors have a lot to consider before deciding to invest in an IPO. Start by researching the company to develop a solid understanding of its business model, fundamentals and the management team. Take the time and actually read the prospectus and check out the growth and earnings potential of the company. As always, do your homework.
For more cool stuff like this, please follow me on Twitter @jimpavia and check out CNBC's Financial Advisor Hub and CNBC + Acorns Invest in You: Ready. Set. Grow.
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