A whole bunch of major initial public offerings are expected to happen in the months ahead. These are well-known names that are sure to garner significant attention even beyond those who follow Wall Street.
The first IPO on the agenda is ride-sharing play Lyft, which is expected to be followed by Uber, Pinterest, Slack, Airbnb and several others.
It has just been reported that Lyft is expected to price shares above the anticipated range of $62 to $68. Obviously, demand is strong and there will be much excitement about the stock and the IPOs that follow.
So how do you trade a stock like this?
The media always seems to operate under the ridiculous assumption that market players are able to receive an allocation of a hot IPO from their brokers. If you are a big fund or produce a huge amount of commissions, you might receive some shares, but no one ever gets as many shares in a hot IPO as they would like.
This is extremely important, because dealing with an IPO when you have an immediate profit is much different than trying to buy the stock after it starts trading. The fact that a hot IPO is trading substantially higher than its offering price doesn't mean that you should be buying the stock.
When brokers do reward allocations, they will sometimes restrict those that are too quick to flip their shares. They want longer-term buyers in the stock rather than hyperactive traders.
If you can flip some IPO shares then it certainly is a good idea to do some selling into strength in the first few days of trading. Some hot IPOs do go straight up out of the gate but many, such as Facebook (FB) , trade under the IPO price fairly fast.
If you don't receive an allocation then you have two choices:
- Look for an entry point and devise a trading plan.
- Look for a name that may enjoy some "sympathy."
If you are an aggressive trader looking to trade an IPO it is really just a gamble to buy the open. Typically, it is better to wait an hour or so after the initial trading for a range to form. That will provide some parameters for buy and sell stops, but stocks move very fast on the first day of trading and it is extremely easy to be whipsawed.
If you are looking for a longer-term investment the best approach is to enter incrementally. Maybe buy some on the first day of trading but leave plenty of room to add shares after the initial excitement dies down.
Sympathy plays can work very well, although often there aren't too many. The Lyft IPO has been stirring up interest in three other names -- HyreCar Inc. (HYRE) and DropCar, Inc. (DCAR) , which have car sharing-related businesses, and GSV Capital (GSVC) , which invests in private companies before they become public.
While IPOs do create market excitement, they will suck up capital that may have gone into other stocks, which can have a negative impact.
If you do decide to play an IPO just stay very aware that the business media are going to be focused on the gain from the IPO pricing, which won't matter to most people.