Here Are 7 Things to Know About Trading or Investing in an IPO:
- Retail investors and retail traders are not the most important investors for a new IPO. Wealthy individuals are not the most important investors, nor are professional traders. The Market Participant that truly matters in terms of the success of an IPO are the Giant and large Buy Side Institutions.
- To follow the Giant Buy Side institutions and to discover which IPO's they are interested in, and which they are not buying is a simple matter of having the correct indicators that tell you when the Giants are buying. These indicators were written for our modern markets, whereas MACD, Stochastic, and other older indicators do not tell you this vital piece of information.
- The Institutional percentage ownership is important. Facebook had less than 2% institutional ownership in the first several months after it IPO'd, because the Giant funds shunned FB immediately and the collapse of the stock was due mostly to their lack of interest. A good IPO will have anywhere from 40-90% institutional ownership. This is because most smaller lot investors and smaller funds are afraid of investing in an IPO. This is because they do not know what information is needed to make a proper assessment of a young firm, and they listen to gurus and recommendation services that are only trying to dump a lot of IPO stock quickly.
- Revenues and Income matter but a company can have a strong IPO even if it is not making a profit yet, IF it is showing that it can make a profit within a quarter or couple of quarters. Giant institutions are long term investors and they will buy into a young firm ahead of strong earnings reports. They can tell when a company has what it takes to succeed.
- Find the Platforms. Quiet accumulation is a very distinct pattern on charts. Candlesticks form in a blocky tight formation with consistent highs and lows. This is due to the specialized order that the Giant Funds use regularly on Dark Pools. This specialized bracketed order is what keeps price in a Platform sideways pattern. This is a newer sideways pattern that first started showing up in charts less than a decade ago. It is a vital piece of chart analysis for retail investors and traders because it tells you if quiet accumulation is occurring. Giant Buy Side institutions keep their investments very private and do not reveal their holdings until they are required to do so quarterly. Only on stock charts can you quickly see what they are buying ahead of the quarterly reports.
- Company management is important to a new firm. It doesn't matter how big a company is but how well it is managed. Facebook had several issues including too many private investors, nearly 500. Also there were too many private investors and insiders wanting to sell too early weakening the opinion of Facebook. The CEO and Board of Directors can make or break an IPO. It is not just the underwriter who must present the company.
- Shares offered at the Initial Public Offering. One of the biggest warning flags for Facebook was its enormous offering of shares. It was far too huge an offering for a good, strong IPO. Most great IPOs that launch and run like LNKD, WAGE and others had small outstanding shares. What this does is it creates a strong supply versus demand equation for the stock which keeps the stock moving upward.
