Yes. There are risks to trading all stocks, especially stocks of companies that recently listed — stock price volatility tends to be higher, so the share price can rise or fall by significant amounts on a single day. Sometimes, there’s pent-up interest and media attention in the ability to buy a company’s shares for the first time.
Initial Public Offering (IPO) Process
Even statements by the company’s leadership or bank underwriters can influence how investors feel, and they may be overly optimistic or pessimistic in the early days of trading.
IPOs can generate hype: Investors shouldn’t get carried away by IPO excitement, and avoid letting emotions (even good old fashioned peer pressure) influence their investment decisions. This heightened attention and media scrutiny can contribute to volatility, so investors should be prepared.
Price support by investment banks: In the first days following an IPO, the bank underwriters are allowed to protect the stock price from falling too much.
What is Initial Public Offering (IPO)?
They may even buy shares of the newly-listed company. Once this support ends, the stock price has the potential to fall below the offering price.
Investors should be aware of price supporting (it’s publicly mentioned in the company’s IPO registration paperwork).
Read it: It’s long, but the prospectus is required registration paperwork filed by the IPO’ing company to give investors info about itself and its stock (you’ll also see it called an S-1).
It’s filled with details regarding the terms of the stock and disclosures regarding the company’s business, financial condition, and management. It’s publicly available, typically at least a few weeks before an IPO, and helps investors decide whether the offering is a good investment.
Initial public offering
It looks like legal paperwork, but it’s usually packed with juicy details on the business model and future goals of the company, too. Not light reading, but worth it.
Risks for stock investing in general: There is always the potential of losing money when you invest in stocks.
You should think about your investment goals and risks you’re willing to accept before investing. The stock price could fall — that’s a risk investors take in return for potential reward. And this risk is especially prevalent with recently listed stocks.
More information on investing in an IPO can be found in this investor bulletin from the Securities and Exchange Commission, which regulates public markets and IPO filings (you’ll notice the SEC referenced in the IPO prospectus).