IPO stocks provide a tremendous amount of growth potential. Typically, they are new companies with dynamic products that are transforming their industry and perhaps the world. But don't just buy an IPO stock at any time. Wait for an initial base formation to offer the first proper chance to buy.
An initial public offering, or an IPO, is a company's first offering of stock to the public. Until a company goes public, most individual investors are unable to invest in the company. But once the stock is trading on a stock exchange — like the New York Stock Exchange or Nasdaq — any investor can purchase shares.
A company "goes public" for a number of reasons, but primarily to raise capital to expand and grow operations. If the company's plans are successful, the stock price should rise, rewarding early stock investors.
An IPO can also be an opportunity for venture capitalists and other early investors to cash out and take profits.
How To Trade IPO Stocks
When a stock goes public, the first day of trading usually is very volatile. With no trading history or prior stock quotes, no one can really be sure of a fair market-based price for the stock. Investors should be patient and wait at least a few weeks for a base to develop.
The IPO base shows a decline from peak to low of usually less than 20%, but can be as much as 50% in the most volatile markets. The length is often less than five weeks and can be as short as seven days. In an IPO base, the pattern typically starts within 25 days of the stock's first day of trading.
An IPO base can only occur in the immediate aftermath of a stock's debut. For example, Google (now Alphabet) went public on Aug. 19, 2004, consolidated sideways for three weeks and then blasted higher on Sept. 16 above a 113.58 buy point. Just one year later, the stock was over 177% higher.
Successful IPO Stocks: Zim Integrated Shipping
Recent successful IPOs include Zim Integrated Shipping. The Israel-based container-freight operator has benefited from global supply-chain issues, which sent shipping costs surging.
The company debuted on Jan. 28, 2021 with an IPO price of 15 (1) and traded below that price in the first day of trading and a few days later. After a three-week rally, shares corrected around 17% over the course of about two weeks, creating an IPO base (2) and showing the new issue's first correct buy point.
On March 11, 2021, the stock broke out past an IPO base's 22.58 buy point, surging more than 14% in heavy volume (3). From there, the stock would go on to hit a special dividend-adjusted price of 78.95 on March 23 of 2022.
How To Find IPO Stock Ideas
Like with other stocks, look for companies with superior fundamentals. Keep in mind that some well-performing IPO stocks sometimes have not reached profitability, but revenue growth is excellent. So the EPS Rating may be poor, while the Relative Strength Rating is strong.
Newer companies with outstanding characteristics can be found in the IBD IPO Leaders screen. It has special screening criteria to find up-and-coming stocks.
This article was originally published April 29, 2022, and has been updated.
