5 Ways Outsiders Can Buy the Next Hot IPO

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When LinkedIn (NASDAQ: LNKD) hit the market last week, it delivered a quick doubler to the lucky stiffs who were part of the initial public offering.

Unfortunately, regular investors like you and me were left out of the party.

That’s the cold reality of IPOs. Unless you know someone at the company itself or have a great investing network with bigwigs on speed dial, you’ll have a hard time sharing in the initial splash of companies like LinkedIn.

It’s a fact that doesn’t bother investors most of the time, but social networker LinkedIn opened 80% over its offer price of $45and topped out at $115 a share hours later, it’s hard not to take notice – and to wonder how we can share in the action next time around.

The good news is that even if you can’t share in the pure IPO of a stock, there are still options out there. Yes, Some of them take a big bank account — but others allow even small-time investors to share at least in part in the public offerings of the hottest stocks.

If you were salivating over LinkedIn and are even more excited over the prospect of an inevitable Facebook IPO, here are five options you may do well to consider:

Buy from Investment Bankers: In an IPO, a company hires financial advisers to structure the transaction – and if you go right to these money-runners, you can get in on the stock offering. These gatekeepers are plainly listed in an IPO prospectus, publicly available on the Securities and Exchange Commission EDGAR database. For instance, LinkedIn’s investment banks included Morgan Stanley, Merrill Lynch and JPMorgan. Unfortunately, these investment bankers won’t give you the time of day unless you make it worth their while with a serious chunk of cash. What’s more, even if you can come up with a few hundred grand, it’s an awfully risky bet to dump that chunk of change into a single company. Disclaimers aside however, in the case of LinkedIn anyone who dumped their entire nest egg into this IPO would have made the investment of a lifetime.

Buy On Secondary Markets: Over the past few years, new markets like SharesPost and Second Market have emerged to trade private company shares. And after some difficulties with Facebook and the current cap of 500 private shares according to SEC rules, there has been a recent push to ease regulations and make this market even more accessible. You could have bought LinkedIn shares on just this kind of exchange prior to the IPO. But the catch is, again, money. You’ll probably have to have north of $100,000 considering the small supply of these shares. There’s also a time element because of the legal hurdles and regulations involved with such a private stock investment. So if you want to get into Facebook or another hot IPO beforehand on the secondary market, you better start doing your homework sooner rather than later.

Invest in IPO-Focused Funds: If you can’t write a big check to share in an IPO these ways, why not pool your buying power with other folks in the same boat? There are a number of mutual funds and ETFs these days that focus specifically on the profit potential of the IPO scene. Take the Global IPO Plus Aftermarket Fund (MUTF: IPOSX).  The fund’s managers at Renaissance Capital are old hands in the IPO scene who provide research services to institutions. The catch is that the fund obviously relies on a few bucks here and there from little guys – resulting in a mere $11 million in assets. Sad to say, even seven figures may not be enough capital to catch the eye of big-time IPO players like Facebook. Another option is the First Trust IPOX 100 Index ETF (NYSE: FPX), which invests rather formulaically in IPOs by buying on the seventh day of trading and selling out on the 1,000th day of trading. Sounds arbitrary, but the one-year return on this fund is 33% — significantly better than the broader market. So maybe there’s something to the strategy.

Buy After Market: This seems like the no-brainer of the century: Wait until after the IPO and buy in. But the trick here is to buy in responsibly and target a quick but substantial gain without getting greedy. The poor saps who simply put in a market order for LinkedIn last week – that is, an order to buy LNKD stock at whatever price the market is setting at that moment – likely paid much more than they intended to. But if you have a few thousand dollars to spare and place a limit order on your transaction – that is, a cap on what you’ll pay per share – you could be able to enter on a dip. Consider LinkedIn’s first day of trading… LNKD spiked to $90 a share immediately, then rolled back to around 10:30 a.m. If you entered a limit order of $85 you theoretically could have bought in on that dip – and hours later when LNKD peaked at $115, a well-timed sell would have netted you a cool 35% gain. Of course, this is easier said than done. Picking the right entry price is very tricky, because a limit order that is too low will never be filled. Also, picking the right time to sell is equally tricky – the peak of $115 for LNKD was very short-lived. But for savvy investors, there is obviously big money to be made with a well-executed swing trade on the day of a new stock’s debut.

Invest in the Investors: Perhaps the most round-about way to play IPOs is to invest in top growth mutual funds participating in the market. Take T. Rowe Price, which announced back in April that it had purchased a stake in Facebook worth $200 million. It has spread the investment across some 19 funds, including Science & Technology (MUTF: PRSCX), Growth & Income (MUTF:PRGIX), Global Stock (MUTF:PRGSX) and New America Growth (PRWAX). And T. Rowe’s New Horizons Fund, which doesn’t currently have a stake in Facebook, has invested in Twitter. Obviously you are also sharing in other investments – so the profit potential isn’t as direct. But for many small-time investors, this is actually for the best. If you are looking for a diversified portfolio with just a pinch of IPO potential for kick, then funds like these may be a decent choice for you.

Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks or funds named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.


Article printed from InvestorPlace Media, https://investorplace.com/2011/05/facebook-ipo-twitter-linkedin-lnkd/.

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