How to Play IPOs

1) Don't bother to try to get an allocation from an underwriter. Hot IPOs are usually oversubscribed, with most shares going to the underwriters' best clients - big investors and institutions. If you do get an allocation, it may be an indication that there is not enough interest in the stock and it will likely decline after it starts trading.

2) Generally, the smaller the cap and the size of the offering, the greater the probability that the stock will go up after the IPO.

3) Stay away from repackaged deals brought out by private equity. These guys will usually squeeze all they can out of the stock, often at your expense.

4) Who is selling the shares? If it's mostly the selling shareholders while the company is not getting any proceeds, why should you be buying?

5) Follow the pre-IPO pricing changes. Last minute pricing increases suggest that an IPO is "hot" - oversubscribed, with demand exceeding supply. Price reductions may indicate the opposite - that there is little interest in the offering.

6) See where the issue prices. If it prices above the latest indicated price range, it's another confirmation that the IPO is hot.

7) Watch how the stock opens. NEVER put in a pre-open market order. It may be tempting to get in ahead of the crowd but the problem is that thousands of other investors may have the same idea. When all the buy orders hit the market at the same time, the stock will likely gap up and you may get filled at the high of the day. It's safer to wait for the initial buying frenzy to subside.

8) An IPO can get too "hot," meaning that there will be so much buzz about it that it will be priced way above any reasonable valuation and won't have much upside left after it starts trading.

9) Watch how the stock trades for a while. A good sign is when it does not gap up much above the IPO price, sells off initially and then starts climbing back up, taking out its high for the day.

10) NEVER buy your entire position at once. IPOs are risky precisely because they do not have a trading history. The longer a stock trades, the better feel you can get for it.

11) Watch the volume. Once the combined volume exceeds the size of the offering, it suggests that everyone who wanted to sell have done so. And if the stock is making new highs, it means there are no bagholders left waiting to sell at a higher price.