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Ask a Fool: Is Investing in IPOs a Good Idea?

Q: Is investing in IPOs a good idea?

Unless you have a long time horizon and a high level of risk tolerance, the answer is generally no. Initial public offerings, or IPOs, can be rather volatile in their first few months of trading.

Just to name a few recent examples, Snap went public in March 2017 for $17 per share, and now trades for around $13. Meal kit delivery service Blue Apron issued its IPO in June at a $10 share price, and it's dropped by nearly 40% in a little over a month. On the other hand, real estate company Redfin priced its IPO at $15 just over a week ago, and its stock has nearly doubled in price.

The point is that after its IPO, a stock's price can move dramatically. Sure, many IPOs double just weeks after going public, but others get cut in half or more. Shares of Groupon, for example, dropped by nearly 90% in its first year as a public company.

Many experts, including some of The Motley Fool's own analysts, advise that you wait for six months to a year after an IPO before deciding whether or not to invest. This way, you'll have at least a couple quarters of earnings to evaluate. One of the biggest problems of IPO investing is that there's generally a limited amount of information available relative to publicly traded companies.

The bottom line is that you shouldn't invest in an IPO with money that you can't afford to lose. If you don't want to gamble with your investment dollars, you're probably better off waiting until the stock has been trading for a while in order to be able to properly evaluate it, and to let the post-IPO volatility subside.

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*Stock Advisor returns as of August 1, 2017.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.