The Dangers of IPOs
Next up on Cramer's tips for investors: the dangers of initial public offerings. Cramer said he's often asked about the next hot IPO coming down the pike. His answer is always the same -- "What price are they offering and how many shares are there?"
When it comes to IPOs it's all about valuation, how many shares are being offered and at what price. He said what starts out as a great offer at $20 a share, can easily get hyped up to $25 a share right before it comes public.
The IPO business also has a habit of limiting the number of shares offered to ensure a big first-day pop in the share price, a pop that will only hurt investors later on. Cramer said his usual advice: If you can get in on one of these "sliver" offerings, do so, but never buy them in the aftermarket.Case in point, the recent IPO of Groupon (GRPN). Cramer said he never liked Groupon the company, but Groupon the IPO was a buy, buy, buy. Why? He explained that while Groupon had 640 million shares of stock outstanding, the IPO only offered a scant 40 million of them to the public. The result was huge demand, which sent shares of the $20 IPO to $28 and then $30 a share on its first day. This was a great return for those in on the IPO at $20, but those who bought at $28 and $30 were crushed as shares slid to under $15 a share in the days that followed.
Few Are ForeverCramer's final tip for investors was that only a few stocks should be held forever. He said that it's not OK to own a stock unless investors know exactly what would make them sell it in the future. Too often investors end up selling a stock at the wrong time because they never anticipated selling it in the first place, Cramer explained. Similar to the "Bristol-Myers theorem," if investors don't know what they own and why they own it, it's easy to panic at the first sign of trouble.
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