My experience getting to participate in an IPO taught me how even in this favored environment, buying stock is still like playing the lottery.
I remember one day in college, my roommate was awakened by a call from his dad.
“You need to sell your stock right now,” he said.
While my roommate had slept, a company he was invested in had had its IPO (Initial Public Offering) and its stock price had blown up to epic proportions.
My roommate dutifully logged on and cashed in, and netted roughly $30,000.
He had been offered private stock in a tech company due to some contributions he had made to its software.
And this had gone from almost nothing to $30,000 in an instant. (And given when this happened, that’s more like $55,000 today.) Not bad for a college student.
I never forgot this moment, and from that point on, I always wondered what it would be like to get in on an IPO, being able to get access to a stock before the general public did. Could I get that lucky?
Years later, I had the chance to find out.
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I do an IPO
I had been an early customer of this (staying-unnamed) private tech company, and was a big fan of them. They did what they did very well, and they did it cheaper than their competition.
Because I was involved with them from an early stage, I received an email from them saying that they had recently filed to go public, and as part of the IPO, they were allocating 5% of the IPO shares to select people, including customers. And was I interested in getting on board?
I was certainly curious. No company had ever invited me to be a part of an IPO before. I had gotten some stock as part of my benefits when I was working for a company, but nothing beyond that.
Fast forward, and I was offered the option to purchase shares of their private stock in advance of their public launch.
Visions of huge payouts
They said that we, the customers, could purchase shares of the company stock at the price of $16 a share. So how many shares did I want to purchase?
I had visions of huge payouts like my college roommate had. After all, isn’t that what happens during IPOs? The stock goes public, and the general public all puts their money into the company, and the stock price soars. Then you can stay on board, or cash out right when the stock pumps.
But there was also the opposite worry: what if the stock tanks? Is that possible too?
A safe bet
In the end, I realized that I had to take my own advice. And an IPO, being a chance to buy stock in a single company, is no different than other stock purchases. And my one hot stock tip, that has served me well for years, is to not buy stock. Instead, buy broadly-diversified mutual funds, so that if one company goes bad, that will be offset by another.
But in the spirit of adventure, I still couldn’t say no. So I bought a handful of shares, really more as a proof of concept than anything else. I wanted to be a part of this, and I wanted to see what would happen.
The result
Well, I’ll just leave the full stock price chart from IPO to today right here.
From a start of $16, it now trades at $6, representing a loss of 63%. But what about that spike on the left side? Could there have been a big win for me if I had sold right then?
Well true, in the first week, the stock spiked briefly at around $32, so if I had sold my stock at that time, I would have made a cool 100% return.
But I didn’t. I’ve held on to my shares, so technically I haven’t lost anything, but I don’t expect to make my money back.
What about that other company?
That other company didn’t do so well either after the initial moment.
The stock price went from a high of $300 to a low of $7 a year later. It never recovered.
But if you sold right at the right time, you could have made a 1000% profit.
Lessons learned
I think in this case I was vindicated by not investing more money into this IPO. The most I could have potentially made was double, but that’s only if I timed the market conditions perfectly, and you know I feel about timing the market.
But aren’t there other companies who IPO and then their stock price rises? Of course. But you never know which ones those are going to be.
Which is why getting in on an IPO, just like buying stocks, is in some ways just like playing the lottery. You might win, but you probably won’t. And you know how I feel about the lottery.
