Review: Should Millennials buy Snapchat stock?

IPOs are sexy. Or at least the ones that make the headlines are. They’re the hot new (huge) company, and now people can get their own little piece of them. Plus they’re usually bouncing all over the place, so they make great news.

But that volatility that reporters love is also a reason that most investors (including Millennials) should avoid them. We’ve looked at IPOs before (back when Snapchat’s IPO was just a rumor), and those lessons still apply.

IPOs act really weird (to use a highly technical term). They don’t act like they should based on their characteristics – and those massive initial pops (if they even happen) don’t always last. Long-term investors don’t need to play around with them.

But there’s another aspect of IPOs that most people get wrong.

Whenever we see one of these initial pops in the first day or so of trading, people talk about it being a successful IPO. That’s wrong.

There are some traders that made a lot of money, but it actually means that the IPO didn’t accomplish its main objective. When a company decides to go public, what it’s doing is raising money. It’s selling its shares to individual investors, and then using that money to (hopefully) grow the company.

So what does it mean when the company’s stock immediately shoots up when it becomes publicly available? It means the company left money on the table.

In Snapchat’s first day of trading, it was up 44%. That may have been based on hype, and it might come down (though we don’t know), but it stands to reason that Snapchat’s shareholders lost out on a huge amount of money.  There are sometimes good reasons to do this, but the bigger the immediate jump, the worse the IPO was for the company.

It’s easy to think of the financial markets as entities unto themselves, but they represent the real economy. Those tickers represent real companies and the work done by real people.

For more on how to think about making the most of your investment portfolio, download our ebook A Minimalist's Guide to Understanding Financial Markets

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