Great timely article on buying ipo's in the open mkt...be careful out there!!...mentions FDRY as well:
Buying on Open at Market? Danger, Will Robinson!
By Ben Holmes
Special to TheStreet.com
9/26/99 4:15 PM ET
It's a common misperception these days that trading IPOs is easy money. I'd like to put this one to bed right here, right now. Winning at the IPO game takes more than just putting in for a few deals and wiring money around the Street. This is a difficult game to master and the price of failure is paid out in cold hard cash.
I was on my way out of the office late Thursday evening when I received the following email from one of my users:
To: Ben Holmes
From: userx
Subject: Egain Communications IPO
Wow, did you see this stock! I purchased 1,000 shares at 36, it's trading at 23! I need help! Is this a company worth keeping in my portfolio, or is it time to sell and take the loss? Email me back ASAP! Thanks!
I knew the deal he was writing about -- eGain Communications (EGAN:Nasdaq) -- it had gone public that same day and had had a pretty dramatic session. The IPO was priced at 12, opened at 34 1/2 then, after a quick rise to 38, it quickly began to fade. The stock continued to fall all the way to 23 where it closed for the day. I wasn't there to see the pain in this poor trader's face as he watched his hard-won dollars swirling toward China, but I know how he felt. I've been there and believe me when I tell you, it sucks.
Anyway, after reading this email I sat back down at my desk to think about how I was going to answer. This was tough -- here was an IPO that had finished its first day up a blistering 91%, yet in its wake had left at least one brokerage account with considerable damage. What happened? For the answer I pulled a chart. The story was right there -- this guy had bought stock at the market, on the open.
Now, I'm not one to go around braying, "I told you so", but I did. Right on my Web site is a list of frequently asked questions and our answers. In that list is the following blob of advice -- I share it with you in the hopes that you will be prevented from tossing your money away like userx. Please, please, read it and commit it to that patch of memory where you store all of your trusted market maxims:
Should I try to buy the "XYZ" IPO at the open using a market order?
This is a tough one, but I'll try to give you my take on it: Buying IPOs at market on open can be extremely dangerous. In many cases where a deal opens up with a big premium, owners of the IPO shares come in en masse to take profits. This can result in a sudden, often violent, drop in the stock's price. Such moves can occur in seconds, seconds, and can result in substantial losses.
In the first few minutes of trading for a hot new issue, orders come in to the market makers so furiously that the reporting systems can become overwhelmed. During such a period it becomes impossible to determine the true market in the stock. What adds further to the confusion is the inability to get a quick report back from your broker. In a situation like this it is possible to have purchased shares at the opening price, then have the stock fall 20, 30, even 40 points, before you have confirmation that your buy has been executed. Believe me, I am not making this up.
Of course, the exact opposite can be true as well: You may buy stock on the open, only to have it trade up immediately in the frenzy of the first few minutes. However, given the tremendous volatility of IPOs, I recommend that you step back and allow the stock to settle into a more defined trading range before putting on a position in a new issue. Remember that your capital is what allows you to trade -- lose it and you'll have a tough time feeding your trading habit.
End of lecture.
This is another huge week for deal production. While there are some decent items slated to price, one stands out as exceptional: Foundry Networks. I love this deal and you will too.
Please use your head out there, there are market makers looking to mount it on their wall. |
