Investing in IPOs no road to easy money for investors, financial advisers say

OTTAWA – The hope of a making a quick buck by getting in on the latest hot initial public offering is tempting.

But investment advisers caution that the hope of turning a quick profit by investing in an IPO is probably more mirage than reality.

Investing in a new company comes with risks that investing in already established companies don’t have and that’s if you can get a piece of the latest hot offering.

Sylvain Brisebois, a regional vice-president for BMO Nesbitt Burns, says many investors think an IPO is a sure way to make money, but that’s not true.

Investors old enough to have lived through the dot-com frenzy will remember the windfall profits many early investors in IPOs of start-up tech companies were able to bank. But they will also recall the massive failures many of those became when the bubble burst.

In addition to the risks that come with buying any stock, Brisebois said an IPO has additional risks.

“It is a little bit tougher to do some research because you don’t have as much financial background as you might with a company that’s been trading for a while,” he said.

Brent Vandermeer, a portfolio manager with HollisWealth, said the “sizzle factor” of an IPO may be alluring, but investors need to remember that a company’s early backers are the ones making the big money.

“The IPO process is really the monetization of those gains for those initial investors,” he said.

Vandermeer said in his experience he’s seen as many IPOs go well as those that have gone poorly.

“Once it launches, if it is a proper assessment of what the market will bear, typically you’ll see it just sort of stay steady,” he said of a stock.

And just getting a piece of a hot IPO can be difficult, especially if you don’t have a good relationship with your investment adviser and a track record of buying initial offerings.

The companies where you are likely to get shares might not be the one that you necessarily want, Brisebois said.

Discount brokers may get a piece of an IPO, but if you have an established relationship with an investment adviser you are more likely to get a piece of a popular offering.

Still, there is no guarantee.

If you can’t get a piece of the company before it starts trading, there’s always the option to buy shares after it launches, but Brisebois cautions against buying immediately after trading begins.

He says the first days for a new stock can see a lot of volatility as the market figures out what a company is worth.

“I would give it some time to let the dust settle and figure out a way to make a smart, rational, well-researched investment decision,” Brisebois said.