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

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You’ve probably heard someone say they wish they had bought such-and-such stock when it first started trading publicly way back when.

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

“With an IPO, you never know which way things are going to go, regardless of how much hype there is about any company going 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 ended up priced at $18, below the original target of $20 to $22.

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While it’s impossible to know with certainty how Rocket’s stock will perform in either the short- or long-term, it’s a good reminder to approach any IPO with a dose of caution.

IPOs are a way for privately owned companies to raise money by selling shares to the public. Before a new stock reaches the market, investment banks, which underwrite the IPO, sell shares.

Typically, those pre-IPO shares are reserved for sophisticated investors or institutions with access to such deals. Those buyers may be required to hold onto the stock for a certain length of time — six months, often — before they can sell it. 

Retail investors usually have to wait for trading to start through a market like the New York Stock Exchange or Nasdaq. 

“If there’s huge demand for the debuting company, you’ll see the stock price pop right after opening,” Boneparth said.

On the other hand, he said, if there’s a lack of demand or the markets think the stock is overvalued, the share price could fall. That doesn’t mean it won’t go back up again, but you could be waiting a while.

For example, Facebook — which now trades above $250 — debuted in May 2012 at $38 share. By August of that year, it had dropped to about $18. It took another year for it to even climb back up to its initial price.

It’s important to do your research on a company before blindly jumping in just because it’s a newly listed stock, Boneparth said. That includes checking out its S-1 filing with the Securities and Exchange Commission to scrutinize its balance sheet and find out the potential risks of investing in the stock.

“If you’ve done your due diligence, the company has strong fundamentals and you believe in the company for the long-term, then it can be good to get in early,” Boneparth said. “The price might be much lower today than years down the road.

“Just don’t buy hype,” he said. “You’re buying a company.”

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