What to know before investing in IPOs
Elon Musk’s rocket and satellite company SpaceX has confidentially filed for an initial public offering with the Securities and Exchange Commission, sources told CNBC’s David Faber on Wednesday. The company may target a valuation of $1.75 trillion with an IPO around June. Bloomberg reportsQuoting people who know the subject.
A confidential filing means SpaceX will file its financial information with the SEC before making it public; This must occur at least 15 days before the IPO roadshow (a series of presentations to attract potential investors).
In general, investors have reason to be eager to get in on the proverbial ground floor of a newly public company. From 1980 to 2025, stocks gained an average of 19% from their bid price on the first day of trading. according to data From Jay Ritter, director of IPO initiatives at the University of Florida.
And very few IPOs are likely to be this interesting. SpaceX is reportedly planning to raise up to $75 billion in funding, which would make it the largest US launch of all time. currently belongs to Alibaba’s $22 billion offering in 2014.
Experts say that under certain conditions, there is short-term money to be invested at the very beginning of the IPO. However, due to the potential for volatility, long-term investors should proceed with caution and may want to take a more cautious path.
“We have always taken a wait-and-see approach in this market,” says Josef Schuster, founder of IPOX Schuster, an investment and research firm focusing on IPOs.
Schuster and other experts say if you want to get involved in SpaceX or any IPO, it would be wise to do some homework on how these stocks are moving. Here they tell you what you need to know.
How to invest in IPOs?
Ritter says IPO shares tend to rise on the first day of trading, but that’s not a guarantee, and there’s about a 25% drop in value. Additionally, Ritter’s data uses a price you may not have access to: the offering price, which is the price set by the underwriters of the IPO before the shares hit a public exchange.
For “hot” IPOs, where he estimates 95 percent of the shares will go to institutional investors, IPO-priced shares are often not offered to retail investors, Ritter says. In all public offerings, Loyalty fixes division 90/10 between institutional and individual investors.
SpaceX reportedly plans to reverse this trend by offering 30% of the offering to retail investors. Bloomberg reports. If you’re interested in buying shares of SpaceX at the offer price, Ritter says it’s worth monitoring whether your broker has access to the offer.
If you cannot buy the shares at the IPO price, you will need to purchase them after they go public. Ritter says it’s unknown how any IPO stock will do once the shares hit the market: “On average, the opening-to-closing yield is around zero.”
Things to consider before investing in IPO stocks
If you’re interested in buying stock in an IPO, experts say there are several factors to consider. Here are three things to pay attention to.
1. Buoy
The percentage of a firm’s stock that is publicly traded, known as its stock’s free float, is an important factor to consider. Very low volatility is a “huge red flag” for companies’ past performance or underperformance, Schuster says.
Issuing a small number of shares can help a company’s stock explode in early trading, he says, but can lead to ongoing volatility and outsized risks if a company receives negative news, such as missing forecast earnings.
Schuster says the stock may be in historically tough territory due to rumors that SpaceX will hit the market with an IPO of around 5%. “Anything below 7%, you have to be really careful.”
2. Sales
When a company makes a public filing with the SEC, pay attention to the firm’s sales, Ritter says.
Companies that went public with at least $1 billion in sales in the past 12 months, on average, keep up with the market within three years of the IPO, he says, “whereas smaller companies, on average, underperform.”
In other words, companies with a proven sales track record are less likely to underperform than those with a better track record.
Ritter says you still need to decide whether the company is worth holding on for the long term based on its fundamentals. Although IPO companies tend to underperform when share prices greatly exceed sales, a stock may still be worth buying, for example, if you believe a firm can improve its financial performance quickly and consistently in the coming years, Ritter says.
3. Portfolio role
Experts say it’s important to examine the role you hope a particular IPO stock can play in your portfolio. Schuster says he generally prefers to invest in a stock after it has spent some time in the market, and warns against trying to play big: Short-term fluctuations that may occur immediately following the IPO.
“I think investors need to be really careful about coming in at this point,” he says. “However, I think down the line, once we start trading, let it trade and let’s see. Entry points into IPOs have been much lower than the first trading day in most cases. [Some companies] “We were not winners when we bought them on the first day or at the first closing, but over time they became winners.”
Both Ritter and Schuster warn against investing too much of your portfolio in a single IPO stock and recommend keeping any investment as part of a larger, diversified portfolio. It’s also wise to talk to a financial advisor before making any changes to your own portfolio.
If you want early access to SpaceX or other pre-IPO names, you can already get them as part of a more diversified strategy.
Mutual funds are allowed to hold up to 15% of the portfolio in so-called illiquid assets, which can include private equity and private real estate assets. Baron Opportunity, an investment fund that aims to invest in innovative, high-growth businesses, holds 14.7% of the SpaceX portfolio, according to the latest report.
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