The initial public offering (IPO) of a well-known tech company tends to be an exciting, highly publicized event. High profile IPOs like Lyft and Pinterest tend to attract the interest of personal investors. However, it’s important to understand the risks and rewards of these IPOs before investing in them.
Be In It for the Long Haul
It’s tempting to plunge heavily into an investment in a tech company if you use and like their platform. But for every IPO like that, there are multiple flops, and when a disruptive tech stock flops, it tends to flop hard. So it’s best to keep a diversified portfolio, just as you would with any kind of investing.
On the other hand, when a company does well, it’s tempting to take the gains and exit, but it may be best to take some profits yet keep your hand in. If you bought Google stock in 2007 and sold it in 2016 you did well, but if you still had it you’d be in much better shape.
Watch the Fundamentals
Investment writer Don Gayhardt has written extensively on the relationship of technology stocks to the world of finance. He observed in a recent article that like any other kind of stock, the company’s success is all about the maturity of its management and the fundamentals of its industry. You may not understand all about the disruptive new technology involved in the company’s offering, but you can observe the management characteristics that lead to success in every industry, like attention to detail, adequate capitalization, and the appearance of a solid growth plan.
Pay attention to missed deadlines and signs of trouble in the product development roadmap. If a product is still in beta, this means that the development team is still working on major parts of the finished product’s functionality. Learn to read through the hype and note where the product is really going from a quality standpoint. Growing pains are to be expected, but too many problems may mean a management team is struggling.
Derivatives Are Not Always a Good Thing in Tech
Financial derivatives are pretty complicated securities. But the “derivative” idea in tech is all too often a rehash of an existing one. Sometimes it’s enough of an improvement that it’s worth a look. There were those that thought Facebook was going to be just another MySpace, and they were wrong. A little competition is a good thing. But be careful when looking at potential technology investments that are described in terms of an existing platform, or which are just another version of something that already exists. The technology adopters see through these attempts to “get on the bandwagon” very readily, and they will not find acceptance in the marketplace unless they have a distinct advantage.
If you view tech IPOs as the high risk and high reward opportunities they are, you can manage them within your portfolio effectively. By keeping a diverse portfolio and applying what you know about business to your investment decisions, you can increase your chances of picking a winner.