As soon as the offering is completed, primary investors are free to sell the stock on the open or secondary market. This is where the average investor often gets into the action. If the stock is perceived as a hot offering, investors may bid its price dramatically higher. But succumbing to the frenzy can often burn long-term, buy and hold investors as hot IPOs flame out months later when business realities set in. What to Watch For The best way to avoid the risk of getting burned by an IPO is to proceed with caution and have realistic expectations.
Companies making the offerings are often young and unproven.
Because the company has been privately held, you may not have access to much information other than the prospectus. What's more, the shares of small company stocks are often more volatile than shares of more seasoned companies. If you decide IPOs are for you, research the companies you are considering as extensively as possible. These factors could include high debt, supplier problems, technical obstacles, reliance on too few customers or legal disputes. If so, the enterprise's prospectus may not be all that bright and the proceeds may make insiders wealthy rather than fuel the company's future growth.