Getting in on an initial public offering
"So far this year, over 40 percent of the IPOs are trading below their IPO price. It may be smart for the individual investors to look at IPOs, but maybe they shouldn't feel that they're missing a whole lot," says Shelton Smith.
In fact, investors may be lucky to lose out. Case in point: In 2005, Refco, a global clearinghouse for derivatives that served more than 200,000 customers, went public. Within months, it fell into bankruptcy.
"It was a financial company that did futures, and everyone thought that they were the greatest company ever and there was a big hoopla when they decided to go public," says Carpenter. "Three months later they have accounting fraud and their CEO is hiding money and debt. You just never know who is going to make it or who isn't," he says.
Also, the discount offered at the initial public offering generally is not that great. According to Shelton Smith, the IPO price should be, on average, a 13 percent to 15 percent discount from what might be the regular trading price.
How to buy new stocks
New IPOs often have limited histories and their valuation can be somewhat mysterious. This is particularly true when a company is in a nascent industry, as dot-com companies were in the 1990s and social media companies are today.
To get some insight into how the company works and how the stock is valued, investors can look at the massive registration document required by the Securities and Exchange Commission for all new securities.
Known as Form S-1, or the Registration Statement Under the Securities Exchange Act of 1933, the offering document must contain specific information for investors, including financial information, the business model, risk factors and information about the industry. These documents can be found on the SEC's website, and they are normally loaded with caveats and disclaimers.
If investors can wade through the document, they can glean enough information about the new company to make a call about the valuation -- is it worth buying at the price people are selling?
Buying individual stocks requires a lot of homework, and they can be incredibly risky. Most individual investors should consider very new companies carefully, and experts recommend devoting no more than 2 percent of your portfolio to any one stock.
Like 1 IPO? Buy a bunch
An alternative may be investing in one of a handful of mutual funds that invest in IPOs, such as Renaissance Capital's Global IPO Plus Aftermarket.
"We're really looking at investing in these companies that are not well-known yet by the market and that have an ability to get us gains very early in the price discovery," says Shelton Smith.
According to Morningstar, a couple of other prepackaged options are available to investors interested in IPOs, including a long/short fund from Direxion Funds and an IPO ETF from First Trust.
And in July, UBS launched a pair of exchange-traded notes focusing on Internet IPOs.
Ultimately, the way to get rich isn't with one successful investment, but by growing a diversified portfolio over time. Just ignore the fairy tales.