If the goal of investing is to buy low and sell high, then getting in on an initial public offering — more commonly called an IPO — must be the ticket to riches. Buy a hot new stock at a discount and then sell it for a huge profit just hours or days later, right? Seems like a sure thing. But for most individual investors, that dream of getting in on the IPO action will never be realized. For every fairy-tale stock that takes off like a skyrocket following an IPO, there are cautionary tales of many more IPOs that post lackluster results.

Some even crash and burn. First, understand the process: When a company goes public and issues stock, it wants to raise capital and make shares available to the public. The IPO is underwritten by an investment bank, broker dealer or a group of broker-dealers. They buy the shares from the company and then distribute the shares to investors. Big buyers easier to find. Selling a million shares to an institutional investor is much more efficient than finding 1, individuals to purchase shares.

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One hand washes the other. Institutions that get to participate in the initial public offering often do a lot of business with the brokers underwriting the deal. Your broker perceives you as poor. Management, employees, friends and families of the company going public may be offered the chance to buy shares at the IPO price in addition to investment banks, hedge funds and institutions. High net worth clients may be rewarded with IPO shares from time to time as well. If you have an account with the broker bringing the company public and happen to keep most of your vast fortune with that broker, you may be able to beg your way into a hot IPO.

Once the stock is trading on the exchange, small-fry investors and big-time professionals have plenty of opportunity to buy shares. In fact, investors may be lucky to lose out.

In , Refco, a global clearinghouse for derivatives that served more than , customers, went public. Within months, it fell into bankruptcy. Also, the discount offered at the initial public offering generally is not that great. According to Shelton Smith, the IPO price should be, on average, a 13 percent to 15 percent discount from what might be the regular trading price.

New IPOs often have limited histories and their valuation can be somewhat mysterious. This is particularly true when a company is in a nascent industry, as dot-com companies were in the s and social media companies are today. To get some insight into how the company works and how the stock is valued, investors can look at the massive registration document required by the Securities and Exchange Commission for all new securities.

Known as Form S-1, or the Registration Statement Under the Securities Exchange Act of , the offering document must contain specific information for investors, including financial information, the business model, risk factors and information about the industry.

If investors can wade through the document, they can glean enough information about the new company to make a call about the valuation — is it worth buying at the price people are selling?

Buying individual stocks requires a lot of homework, and they can be incredibly risky. Most individual investors should consider very new companies carefully, and experts recommend devoting no more than 2 percent of your portfolio to any one stock. Just ignore the fairy tales. Bankrate is compensated in exchange for featured placement of sponsored products and services, or your clicking on links posted on this website.

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IPO Stocks To Watch: Top New Initial Public Offerings, Upcoming And Recent IPO Filings | Stock News & Stock Market Analysis - IBD

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