Profit from Upcoming IPOs with This One Simple Strategy By Kyle Anderson

Through the month of August, 188 companies have gone public in the United States, with some high-profile stocks like GoPro Inc. (Nasdaq: GPRO) and El Pollo Loco Holdings Inc. (Nasdaq: LOCO) posting triple-digit gains in their first several days. That has investors clamoring for new upcoming IPOs to profit from. The post Profit from Upcoming IPOs with This One Simple Strategy appeared first on Money Morning - Only the News You Can Profit From .

After a streak of huge initial gains for 2014's newest stocks, investors have been clamoring for upcoming IPOs to profit from...

Through the month of August, 188 companies have gone public in the United States, with

high-profile stocks posting triple-digit gains in their first several days. GoPro Inc. (Nasdaq: GPRO) jumped 103% in four days, and El Pollo Loco Holdings Inc. (Nasdaq: LOCO) spiked 175% in six days.

But chasing new IPO profits as soon as a stock starts trading isn't a smart investing strategy. For every upcoming ipostriple-digit winner, there's an IPO loser whose stock drops immediately once hitting the market.

For instance, NephroGenex Inc. (Nasdaq: NRX) and Amedica Corp. (Nasdaq: AMDA) are down 60% and 51% respectively since holding IPOs this year.

In fact, finding huge gains in the IPO market can be even trickier than just finding winning stocks...

"I often refer to the IPO market as the 'rich-man's market,'" Money Morning's Defense & Tech Specialist Michael Robinson said. "And it's reprehensible that the gains are reserved for the rich."

You see, unless you're a Wall Street insider or a very wealthy investor, investing in IPOs can be almost impossible...

Investing in IPOs: An "Ultimate Insiders" Game

When a company decides to go public, one of the first things it does is hire an investment bank to "underwrite" the financial filings required by the U.S. Securities and Exchange Commission (SEC).

From there, the IPO filing process is demanding.

The company and underwriter determine how much money will be raised, file registration documents, identify any legal issues, determine the IPO date, and decide on the share price. The process takes months to complete, giving the company time to hype up the stock and excite potential investors.

As the IPO date approaches, the underwriter will begin selling the shares of the stock for the company.

That's where the common or "retail" investor comes into play, right? Not exactly.

The investment banks that perform the underwriting are typically large firms like JPMorgan Chase & Co. (NYSE: JPM), Goldman Sachs & Co. (NYSE: GS), or Merrill Lynch, to name a few. When it comes time to sell shares of the newly public company, these firms will typically sell shares to their favorite institutional clients.

Since so many companies will want a huge investment firm performing their underwriting, the banks can be choosy about which companies to underwrite. They'll pick the companies they think will have the most successful IPOs. In turn, they reward their favorite clients with shares of the hot upcoming IPO they've just underwritten.

Additionally, firms will want to sell large chunks of their shares to very wealthy investors rather than selling smaller amounts of shares to thousands of retail investors. They want investors who can buy in bulk.

And the little guy is left watching...

"As I often tell people, because Wall Street tends to reserve the hottest issues for its 'best' customers - folks I often describe as the 'ultimate insiders' of the U.S. financial markets - IPO deals can be tough for retail investors to get into," Robinson said. "And even if you do manage to get a few shares, there are still difficult decisions to make - such as how long you should hold on, or under what circumstances you should sell."

In an attempt to capture some of those huge IPO profits, retail investors will often wait until a company goes public to buy shares... But that can an extremely risky strategy. Here's why...

IPO Investing's Biggest Dangers

Investors see companies that post triple-digit gains on their first day of trading and figure if they jump in right when the stock goes public, they'll still capture most of those profits.

However, when a stock opens up 100% higher than the initial set share price, that's where the retail investor is buying in. Those who just bought in are missing out on the 100% gains the wealthy IPO investor already banked.

Now, if the stock pares its gains and finishes its first trading day up 50%, the retail investor has then lost 50% of the original investment.

Those "ultimate insiders" who were in before the stock went public are left celebrating a 50% one-day gain.

Another challenge for the retail investor is finding the right IPO to invest in. Companies going public will naturally promote the best parts of their businesses, and bury the less desirable information.

To someone without a deep knowledge of the company, most IPOs will look compelling, even when they're not. That leaves many retail investors striking out on IPOs they thought were home runs.

While IPOs pose numerous risks to retail investors, there are still ways to profit from the IPO market...

Using IPO ETFs to Your Advantage

IPO ETFs like the First Trust IPOX-100 Index Fund (NYSE: FPX) and Renaissance IPO ETF (NYSE: IPO) are open to everyone and are great ways to play the IPO market.

FPX, created in 2006, aims to avoid the early share-price rise and fall that can trap some investors. It aims to correspond to the performance of the IPOX-100 U.S. Index, which measures the performance of the top 100 companies ranked by market cap in the IPOX Global Composite Index. The global index only includes a stock after it has been trading for at least seven days and removes a stock on its 1,000th day of trading.

According to the Renaissance fund, it holds only the largest and most liquid newly listed U.S. IPOs. Stocks are only added to the portfolio after they have traded for at least five days and are removed after two years.

Granted, one-day triple-digit gains are rare with these ETFs, but so too are major losses.

For investors who aren't yet among the "ultimate insiders," these ETFs offer the best way to play the IPO market.

There is another way that works for some IPOs, but not all - and it's the best way to profit from the upcoming Alibaba IPO...

You see, there's an Alibaba "Shockwave" Effect - this company's debut is so huge, and it's such a major play in its market, that related investments are already on the rise.

They're poised to keep going even after the upcoming Alibaba IPO is over. Our research shows you can start profiting now - check out these three Alibaba profit plays today.

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The post Profit from Upcoming IPOs with This One Simple Strategy appeared first on Money Morning - Only the News You Can Profit From.

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