Real estate company Better.com provided promising solutions for homebuyers with extremely low rates for mortgage financing. After gaining immense traction during COVID-19, the company was valued at $7.7 billion and went IPO this week, opening at $17.44 on Thursday morning. The optimistic future that Better.com’s investors poured billions into came crashing down moments later when the stock plummeted over 93%, leaving investors with a great deal of uncertainty and disappointment. Here are some ways that investors preparing to invest in IPOs can avoid situations like this.
Pros & Cons of IPO Investing
IPOs allow investors to get an early head start on a stock when they have enough knowledge about the company to invest and could potentially make high returns. Additionally, increased media coverage about the IPO can provide up-to-date information about the company and the status of the brand new stock. On the other hand, IPOs can also be dangerous to invest in due to lack of financial information. Many traders depend on long term financial data accumulated over time to evaluate a stock, such as financial ratios and other statements, and the lack of this information does not reveal a stock’s true potential; this is why IPOs are mainly for the short term only.
How to Invest in IPO
When dealing with great uncertainty, investors should take advantage of research, risk tolerance, and investing goals. Having as much information as possible about a company’s industry trends, competition, and overall potential can give investors a big picture even without specific financials. For example, Better.com’s layoffs or lack of proper leadership are crucial for the future of the stock. When investing in the unknown, only investing money that you can tolerate losing can soften the blow of a bad IPO with significant losses. Finally, evaluating whether your investing goals are long-term or short-term can determine whether IPO investing aligns with your goals, since it is mainly for the short-term.