Q. Dan, I understand SpaceX is finally going public. I can’t wait to jump in and invest. How much will shares sell for? — John in Indian Harbour Beach
A. John, indeed, reports indicate that in a few months anyone who wants to own a piece of SpaceX will be able to do so by buying shares in the open market. There is already excitement building and there will be no lack of press to drive more interest as this Initial Public Offering (IPO) nears.
How much will shares sell for? Literally no one knows for sure. That unknown will drive a lot of the pre-IPO coverage. Now, there will be an established offering price declared but the odds of you, me or any other person buying shares at that price on the open market is very small. As soon as shares are available on the exchange, the price is subject to the whims of the marketplace.
If demand is high, the price you pay may be much higher than that initial offering price. Many stocks experience a “first day pop” but that doesn’t mean getting in early on day one will be profitable. I’ll give you two examples from prior highly publicized IPOs.
Facebook (now called Meta) went public in 2012. There was a very quick “pop” over and above the offering price, but it did not last. Because almost all the trading activity occurred above the closing price that day, anyone rushing in likely ended the day with a loss. The stock price continued to decline for months and did not overtake its offering price for more than a year.
Another IPO with a lot of hype but a local tie came in 2021 with Rivian, the electric vehicle manufacturer founded by a Melbourne Central Catholic alum. It too had a first day pop but prices stayed high. As a result, even though the stock closed that day almost 30% higher than the offer price, many first day buyers did not profit from jumping in. Rivian’s IPO was hailed as a success while Facebook’s was described as “botched” and “failed.”
Hype, urgency can make ‘fertile ground for fraud’
If your intent is to get in fast and make a quick buck on a first day pop, you aren’t really investing. You are speculating.
Now, if you are looking long term, you should know the first day action is not a great predictor of how a stock will do. Meta stock got off to a rocky start but anyone who bought on day one and held on through that first year decline is probably very happy today. Rivian, on the other hand, is trading down roughly 85% from its closing price at the end of its first trading day.
For what it is worth, both results are outliers: Meta for its gains; Rivian for its losses. For what a typical result looks like, you can turn to Dr. Jay Ritter at UF. He has spent decades studying IPOs and has found that most IPOs underperform similar sized firms and the market at large by several percentage points over the long-term on an annualized basis. So much so that his and other academic studies give credence to the crack that when the public sees IPO, they should think that stands for “It’s Probably Overpriced.”
I also want to point out that hype and urgency can make fertile ground for fraud. With every highly publicized IPO, there will be several scams aimed at getting unsuspecting outsiders “in” on the IPO before its first day of trading. Be highly skeptical of such offers.
There is nothing wrong, per se, with buying some SpaceX stock the day it goes public. I am excited to see what the company will do in space. Jumping in on day one could work out great. Just don’t bet your life savings on it. An occasional speculation is fine, but a true investor stays diversified, disciplined and patient and would never risk their financial security on getting a good result from buying on opening day of any company going public. To non-employees, the fate of any one company or its stock should be irrelevant to their financial security.
Dan Moisand, CFP® has been featured as one of America’s top independent fee-only financial planners by at least 10 financial planning publications and practices at one of America’s most decorated independent firms. For more info, e-mail dan@moisandfitzgerald.com, visit moisandfitzgerald.com or call Dan at 321-253-5400, ext. 101.
Originally published on FloridaToday. Read the original article here.