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Why IPOs like Rocket Companies can be a tricky game for investors

You have probably heard someone say that they wish they had bought such a stock when it first started trading publicly long ago.

Remember that reflection is usually 20-20, including when it comes to how shares in an initial public offering will go.

“With an IPO, you never know how things will go, no matter how much hype there is about any company that will go public,” said certified financial planner Doug Boneparth, president of Bone Fide Wealth in New York.

Rocket Companies, parent of mortgage lender Quicken Loans, hit the public market on Thursday. Shares fell to $ 1

8 below the original target of $ 20 to $ 22.

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While it is impossible to know for sure how Rocket’s stock will work in either the short or long term, it is a good reminder to approach all IPOs with a dose of caution.

Listing is a way for privately owned companies to raise money by selling shares to the public. Before a new share reaches the market, investment banks, which overwrite the IPO, sell shares.

Usually, the pre-IPO shares are reserved for sophisticated investors or institutions with access to such offers. These buyers may need to hold on to the stock for a period of time – often six months – before they can sell it.

Retail investors usually have to wait for trading to begin through a market such as the New York Stock Exchange or Nasdaq.

“If there is a huge demand for the debuting company, you will see the stock price pop right after opening,” Boneparth said.

On the other hand, he said, if there is a shortage of demand or the markets think the stock is overvalued, the stock price could fall. That does not mean it will not go back again, but you can wait a while.

For example, Facebook – which now trades over $ 250 – debuted in May 2012 at $ 38. By August of that year, it had dropped to about $ 18. It took another year to even climb up to the original price.

It is important to do your research on a company before you blindly jump in just because it is a new listed stock, Boneparth said. This includes checking out its S-1 filing with the Securities and Exchange Commission to review its balance sheet and find out the potential risks of investing in the stock.

“If you have done your due diligence, the company has strong foundations and you believe in the company in the long run, it can be good to get in early,” Boneparth said. “The price may be much lower today than years on the road.

“Just do not buy hype,” he said. “You’re buying a business.”

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