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IPOs Keep Feeding The Market's Appetite For Risk

James Dennin, Kapitall: Enthusiasm for Initial Public Offerings (IPOs) is said by many to be at its highest since before the financial crisis. Nearly 130 companies have debuted so far this year, the most since 2007, as firms seek to take advantage of the optimistic market of new buyers. Of the six companies that posted their first offerings last week, five saw a rise on share-price over the course of Friday's trading. And this week, rumors swelling about the upcoming IPOs for Twitter and Dropbox have driven excitement for new tech stocks even higher.

[Read more from Kapitall: Boston Globe Sold for the Price of an Infielder]

Some analystis are arguing this trend leaves nowhere for these social media stocks to go but down. Citing a "Facebook effect" (FB), they are are arguing that Facebook's boost in mobile earnings have sent investors flocking to companies that have stakes in mobile software. The spike in demand isn't exactly creating a favorable environment for buying. For instance LinkedIn's (LKDN), price has more than doubled since its initial offering, prompting some to wonder whether the company is returning too much cash to shareholders as opposed to investing it.

IPOs are commonly considered risky investments, because a company's early trading is often highly volatile, and much of the information usually made available to investors is not yet accessible. Just because a young stock's price goes up, does not mean that it is adding customers, boosting sales and revenue, or developing new products. In fact, The New York Times recently reported that many of the major investment banks have begun bringing analysts to meetings with companies that are considering taking their stock public.

Analysts are usually not supposed to be involved in bringing in business for the banks that employ them – after allegations that arose nearly a decade ago that they had been inflating ratings to help bring in new clients. That the practice has resumed leaves many concerned that firms on Wall Street might have overvalued some of the companies they represent. 

However, potential profit margins on IPOs can be hard for many to resist, whether or not the company's executives seek out a pop, or the spike in share-price designed to boost a company's reputation and endear it to shareholders. Facebook avoided this strategy, deciding to keep the share-price low as it worked out revenue problems with its mobile division. This strategy paid off heavily for some of Facebook's shareholders. Mark Zuckerberg made over $3 billion on his shares in a single day following its Q2 earnings announcements, while some more modest investors lost everything

The success of IPOs like Linkedin, and Sprouts (SFM) have driven up demand for new stocks. However investors should be mindful that not all of these young tech companies have been entirely successfull. Zynga's (ZNGA) share price has declined since its IPO, as bad investments and increasing competition forced the young company to lay off 500 workers this year. This week will bring five more IPOs, including China Commercial Credit (CCCR), a microlender, and Envision Healthcare (EVHC) – a medical contractor which hopes to profit from the implementation of the Affordable Care Act.

Do you see investment opportunities in IPOs? Use this interactive list to begin your own analysis.

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