HispanicBusiness

Fresh meat. That's one way to describe the allure of initial public offerings. An IPO is an opportunity to trade something new. However, one can't mistake this as the quintessential "ground floor opportunity" of investing.

IPOs come in all shapes and sizes. It's not all about fast-growing upstarts. Keep in mind that companies like Burger King and MasterCard just went public last year. Earlier this month, a few household names like Virgin Mobile and Sony's financial unit jumped into the ticker-tape parade. So, no, it's not as if IPO investors are snapping up lottery tickets backed by obscure companies.

Another assumption that investors wrongly make is that all IPOs take off. They don't. For every Baidu.com that went public at $27 two years ago and is trading at roughly $300 today you have a Vonage or a Worldspace that is trading for pennies on its IPO dollar.

The flipside to that is another flawed assumption. When a hot IPO hits the market, investors often smack themselves for missing out. Again, it's not that easy. Wall Street knows where the hot IPOs are going to be. They are typically oversubscribed by potential entry-level investors. Lead underwriters offer the shares to their best brokerage accounts, forcing everyone else to buy when the shares begin trading.

So, sure, the gains may look great on paper, but you probably never had a chance to buy at the actual IPO to begin with. Sometimes a consumer-driven company will go out of its way to give its customers a chance to get in on the IPO, alongside the institutional investors. Google did it. Vonage did it. Boston Beer, the company behind the Samuel Adams lagers, even put share purchase prospectus applications on its beer bottles. Obviously the Google IPO worked out well for its first investors, though the same can't be said for shareowners of Vonage.

So what's an investor to do? Most companies won't reach out directly to the consumer. Most compelling IPOs will require that you have existing relationships with its underwriters. So you don't have to smack yourself for missing out on next month's Alibaba.com IPO or this summer's big VMware offering.

For most investors, you will just to wait until the stock physically begins trading, and that is where the problems start. Yes, Baidu.com went public at $27, yet the very first trade happened at $66. Chasing an IPO can be dangerous. Just ask any investor who paid more than $100 a share to own a piece of Planet Hollywood when it went public several years ago.

However, sometimes solid companies don't get that initial pop. Mercadolibre is a company that you may be familiar with. The company runs eBay-like exchanges in Latin America, with its biggest presence being in Argentina and Brazil. The IPO took place two months ago at $18. The stock opened at $22. The stock has since gone on to nearly double since then. Google went public at $85 three years ago, opening at $100. That may seem like a juicy pop, but not when you eye the shares that crossed the $600 mark a few days ago.

So learn to appreciate IPOs for what they are. They are new stocks to trade, but they also require a fair deal of due diligence homework to make sure you buy into the right ones without overpaying.

Rick Munarriz is a personal finance columnist for HispanicBusiness.com. He has written for sites such as The Motley Fool and Citysearch and has appeared on NPR, TechTV, and CNN en Español. He can be reached through www.Reportedly.com where he discusses his latest articles.