Playing with IPOs

[BigNick]

DW allows me to manage her online brokerage account (under the French system, we are each entitled to up to place around $150K with reduced capital gains tax on the profits, as long as we buy European stocks).

Most of the money is in a German (DAX) index tracker, but a couple of months ago I noticed on my bank's online trading service that I could buy into some IPOs of French startup companies (a lot of whom seem to be in biotech or other medical stuff).

I've been playing with these for the last few weeks and it seems that there are some big advantages to buying IPOs:

1. There are no transaction costs. (This may be a local thing.) If I buy 100 shares at an IPO price of $10, I pay $1,000 only - no commission or taxes on the purchase.
2. The market seems to have trouble working out what the true value of the shares is in the first 2-3 weeks. I've found that by setting a limit order to sell at 8-10% above what I paid for them, I've made money on all 5 of the IPOs that I've tried so far. That means that with the $5,000 or so I've been playing with, I'm up $600 in about 10 weeks, which is a nice annualised rate of return. I've decided to bail out after a month if I haven't made my 8-10% in that time, but it seems that small IPOs are rarely massively overpriced.

Does anyone else do this? What are the (non-obvious) downsides?

 

[MRG]

Nerver got in, tried playing twitter, no luck getting allocation. You make me curious, about smaller less know IPOs, maybe I'll poke around a little.

I guess the only downside, is an experience like Facebook.
Thanks,
MRG

 

[BigNick]

Bump... since I made the previous post, I've had some good and some bad experiences with IPOs. On average, though, I've beaten the index.

I got lucky this week. I bought two new IPOs that were meant to launch on the same day (last Friday). I logged in on that day, but one had been delayed until Tuesday for some reason. The other was up a nice 8% from its initial price, so I sold it and made $100. I forgot about the delayed one for a couple of days, then logged in yesterday (Wednesday) to discover that it had launched on Tuesday, and after a quiet morning, gone nuts. It launched at 2.55 and by Wednesday lunchtime hit 10.50. I sold at 10.30 and made 3K profit on the 400 shares I owned. Excel says that's an annual compounded growth rate of 360,000,000,000,000,000,000,000,000,000,000,000,000%.

 

[nuke_diver]

I have some fun money that I will risk on IPO's. The problem I've had is that the ones I want tend to be the ones that everyone wants and I never luck out with allocation cause I always ended up bidding too low. Last try was Shake Shack at $19, IPO was 21 and immediately went to something like 48...I stopped looking after that ...it was too depressing

 

[Rickt]

Isn't there a minimum holding period required by your broker before one can sell IPO stocks to keep your account in good standing? How do you get around that requirement and sell IPO upon debut?

 

[BigNick]

Isn't there a minimum holding period required by your broker before one can sell IPO stocks to keep your account in good standing? How do you get around that requirement and sell IPO upon debut?

Apparently not. I live in France, so maybe the French brokers and/or stock exchange have different rules from the US.