Initial public offerings can command a lot of attention, but most retail investors tend to contain their enthusiasm and wait at least a month to jump in.
According to a survey from E-Trade Financial Corporation, an online stock brokerage firm for self-directed investors, 60% of investors wait at least a month after an IPO before investing in the stock, with the majority jumping in around the one-month mark.
They may find the water warmer if they jump in slightly earlier, according to an IPO expert.
Mike Loewengart, vice president of investment strategy at E-Trade, does not believe the one-month mark is tied to any particular event, though the underwriters on an IPO tend to release their initial recommendations on the company about 25 days after the company goes public. Those reports, in addition to a month of monitoring the stock’s performance, point to investors gauging the market reaction to a stock.
“The one month [period] indicates that investors are cognizant that a newly public company needs some time to be seasoned to trading,” said Mike Loewengart, vice president of investment strategy at E-Trade.
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However, Jay Ritter, a finance professor at the University of Florida and who studies IPOs, has found that IPOs that begin trading flat or down tend to continue to stay down until the underwriters release their reports.
“Consequently, waiting 23 days rather than 30 days would be a better strategy,” as it could allow an investor to catch the stock before a bump, Ritter said.
This was certainly the case for Snap Inc.
, which saw it shares soar as much as 6% when underwriters released their notes on the stock, pushing the stock to 41% higher than its IPO price after a month of stock turbulence. But shares have not stayed at that level.
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Investors may want to be wary of microcap companies for up to two years, Ritter said. He has found that companies that go public with less than $50 million or $100 million in annual revenue underperform in the first two years, with the time period from six months to 12 months and the full second year as the worst periods for the small companies.
That trend has largely held up across the past three decades, he said.
Still, some investors do not want to wait that long. The next largest percentage of the investors surveyed, at 21%, said they would jump in on the first day of investing, with the percentage fairly consistent across all age brackets, from age 25 to older than 55.
The survey was made up of 959 self-directed active investors who are managing at least $10,000 in an online brokerage account, which was not necessarily through E-Trade.
Those entering at the beginning and looking for “immediate economic benefit” may not have seen it this year, as the average first-day pop for an IPO had been just below 9% so far in 2017, according to Renaissance, a manager of IPO-focused ETFs.
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It’s hard for retail investors to get a slice of an IPO in the offering, as underwriters typically allocate only about 25% of the shares to retail, with the rest going to institutional investors, according to Reena Aggarwal, a professor at Georgetown’s McDonough School of Business.
Retail investors tend to be more interested in an IPO if they’re familiar with that company, such as Snap or Blue Apron Inc.
, but if the rest of the market is also interested in the buzzworthy offering, it’s even harder for the retail investors to get in, she said.
Overall, Loewengart says the point at which a retail investor buys stock in a recent IPO depends on whether they view it as speculating, as in anticipating an “immediate economic benefit,” or a longer-term investment strategy.