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So you want to buy into a red-hot initial public offering (IPO). Unless your brother is a broker, you probably won’t get shares in the next Commerce One (Nasdaq: CMRC), which has soared more than 2,900% since going public last year.
And what a year 1999 was for IPOs. Newly public companies raised $68.9 billion last year, nearly twice the $36.4 billion in 1998, according to IPO.com (www.ipo.com), an online provider of new-issues information. The latest figure also beat the IPO record of $48.9 billion set in 1996.
The IPO market is an exclusive club however, requiring time, money and exhaustive research. Institutional investors like portfolio managers, and a handful of wealthy individual investors, get first crack at new stock offerings, leaving the average investor locked out. Professional investors tend to “flip” or quickly sell shares of a newly public company whose prospects may be shaky. Also, many IPOs can fall just as fast as they’ve skyrocketed in the aftermarket, the volatile three- to six-month period after a firm goes public.
“Investors have to do an incredible amount of homework on IPOs, so unless you want to be a surrogate portfolio manager, IPOs aren’t the place to be,” says Irv DeGraw, research director for WorldFinanceNet.com (www.world financenet.com), an online service for individual investors.
There are ways get past the IPO velvet rope, however, from buying a mutual fund geared to new issues, to opening an account with an online discount broker who gets a piece of the new-issue action.
For investors who want exposure to IPOs without the risk of buying individual stocks, DeGraw recommends IPO Plus Aftermarket fund (Nasdaq: IPOSX) (888-IPO-FUND; www.iphome .com), a mutual fund that invests specifically in IPOs. Renaissance Capital, a Greenwich, Connecticut investment bank specializing in new issues, sponsors the fund.
The minimum initial investment for the fund is $2,500-still cheaper than losing your shirt in a newly public stock that crashes and burns. IPO Aftermarket had a total return of 114.89% in 1999, beating the average return of 56.21% garnered by small-cap growth funds (See “Good things come in small packages,” Moneywise, May 2000).
Also, they are a growing number of big investment banks who’ve allied with discount brokers to give their customers an opportunity to buy shares in select IPOs.
These limited offerings go to the biggest online brokerage customers, however, DLJ Direct, a unit of Donaldson, Lufkin and Jenrette, limits IPO access to those with accounts in excess of $50,000. And Fidelity Brokerage and Charles Schwab lean toward big, long-time customers with predictable bill-paying patterns. Be prepared to open an account of at least $10,000 in most cases.
If you think you can stomach the risk of buying individual IPOs, research upcoming offerings vigorously. One of the best places to go is the SEC’s Edgar Online site at www.freedgar.com.
Bear in mind that for every IPO like Commerce One, there’s a Value America (Nasdaq: VUSA) waiting to implode; it’s plunged 83% since going public last year.