Stock investing isn't just for the rich: it's for everyone. If you have a retirement account, you could be directing your money into the stocks that you feel good about. But there are some stocks that have higher levels of risk and reward than others. One such type of stock is an IPO.

What Is an IPO?

An IPO, or Initial Public Offering, is a stock that's never been open to the public before. A private company has decided to go public and sell shares, generally to secure a large round of funding for expansion. 

Why Are IPOs a Good Choice?

Often, companies undervalue themselves at the start, in order to drum up interest. Many IPOs have skyrocketed: they may start at $25 and end up at $60. A company will often gain most of its stock value during this initial public offering, if it's going to gain value.

But IPOs are also dangerous, because sometimes a company can start off over-valued. If a company starts off over-valued, then it will lose money rather than gain it.

What Determines Whether an IPO Rises or Falls?

It's two things: speculation and fundamentals. The fundamentals of a business are easy to understand. If the company is profitable and doing well, it's likely that the stock is going to do well, because the company is going to do well.

Unfortunately, speculation can complicate matters. The more people buy a stock, the higher it rises, even if it doesn't deserve to rise. If investors speculate the stock will rise, it will often rise, even if there's no merit to it. Thus, the general temperature of the market and what people are saying about the stock matters a lot, sometimes more than the fundamentals.

Should You Invest in IPOs?

Due to the high-risk factor, while you may want to invest in IPOs, they shouldn't be a large part of your portfolio. It's best to invest in IPOs slowly: you can invest in one or two at a time if the companies are ones that you truly believe in. 

Before most investors get started, they should invest in their own knowledge. A simple stock investing guide book, stock investing blog, or stock investing podcast will give you the information that you need to make educated choices. You don't need a degree in finance to start investing your money, but you should be cautious as you learn.