Why You Should Avoid IPOs

The IPO market is hot in 2013, with Twitter bursting onto the scene and gaining 73% the moment trading began. But few retail investors got the chance to buy Twitter for the premiere price of $26 per share, and the reasons for that are cause to avoid IPOs as they hit the market.

Goldman Sachs led Twitter's IPO, choosing who could get shares for $26 per share and even picking the price. This system gives Goldman Sachs and other investment banks an incentive both to pick preferred clients and to underprice the offering. Retail investors are left out in the cold as these insiders reap quick profits.

One way to get in on IPOs is when companies use a Dutch auction -- something Google did when it went public. But this isn't a commonly used method, so retail investors don't often get in on the action.

Erin Miller sat down with Travis Hoium to see how the game is stacked against retail investors and why investors may want to stay away from the IPO process altogether.

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The article Why You Should Avoid IPOs originally appeared on Fool.com.

Erin Miller has no position in any stocks mentioned. Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs and Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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