The Only Smart Way to Trade IPOs
One of the worst things you can do as a trader is get caught up in hype, especially when it comes to IPOs. Far too often, we’re led to believe that stock ABC could be the “hottest IPO of the decade,” only to watch it fall flat on its face.
Look at the Snap IPO for example.
It was one of the most hyped IPOs in recent in the press. On the first day of trading, shares roared to a high of $29.44, as giddy investors flocked to the name in search of unimaginable riches. But with a company grossly overvalued with heavy debt, and no real chance, it never deserved the valuation it received out of the gate.
Months after the rose-colored glasses were removed, investors watched their beloved, over-hyped stock sink to an August 2017 low of $12.57.
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Granted, there are plenty of IPOs that go on to be quite rewarding. But even then, buying the hype wasn’t always safe. In fact, with any IPO, you’re always better off waiting for the hype to fade and then buy.
For example, when Alphabet (GOOG) went public, shares rocketed to $600 on day one. Then, they fell to $500. Any one that chased it, lost initially. The same thing happened with Facebook (FB). Right after going public, it fell to less than $20 from a high of more than $40.
We could go on but you get the point.
Buying anything on hype is the wrong way to invest. All you’re foolishly doing is getting caught up in a wave of herd mentality gone wild with greed.
Instead, what you want to do is buy a trade that offers you exposure to the hype without buying the actual hype. You’d want to look at an opportunity such as the First Trust IPOX Index Fund (FPX), which tracks hot IPOs in their first 1,000 days of trading. By buying it, not only can you avoid paying gobs of money for IPOs that may or may not work out, but you’re also being exposed to multiple hot IPOs at the same time at lesser cost.
As of August 2017, it traded as high as $60 a share.
Plus, as you can see, it never once took a hit on the SNAP IPO either. In fact, even with some of the most obnoxious IPO failures, the ETF managed to run from a 2009 low of around $11 to $60. I’d rather put my money there, knowing it’ll be safe than risking it to a potential IPO disaster like SNAP.
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