A year to remember for stock-market debutantes
If buying into an IPO gives you chills, a couple of specialty funds
For some investors, 1999 could be considered the year of the initial public offering.
More than 500 businesses offered stock for the first time on various US exchanges this year. Those stocks rose an average of 66.6 percent during the first day of trading.
Such startling gains can quickly conjure up images of instant riches, but knowing which IPOs to buy requires much research and remains a risky proposition. Studies have shown that IPOs have underperformed the stock market in general year after year.
But for investors who land the right company - say the next Microsoft - the long-term rewards can be substantial.
In fact, many regular mutual funds, especially small-cap growth funds, often buy shares of IPOs in hopes of picking a long-term winner.
Unfortunately, many IPOs go from riches to rags. For every Microsoft, there are probably nine or 10 Boston Chickens - IPOs that start on a path to glory only to wind up on the bottom of the food chain. (Boston Chicken, opened to major market hype and soaring profits in 1993. It later became Boston Market after sales lagged, filed for bankruptcy last year, and is now being sold to McDonald's.)
IPOs have generally only been available to institutional investors or the well-connected. Small investors have usually only been able to buy into them after the initial price spurt has settled back into a much smaller gain.
"As a long-term proposition, buying and holding a big basket of IPOs hasn't been all that lucrative...." says Scott Cooley, a senior analyst for mutual-fund tracker Morningstar, in Chicago. "People seem to get interested in them for all the wrong reasons.