Companies list their shares to trade in the public markets for the first time in an initial public offering, or IPO. In doing so, they offer investors an opportunity to share in company profits but also expose investors to the risk of financial loss. Mutual funds are investment vehicles run by professional money managers. Fund managers combine the investment capital of multiple investors together and invest across stocks and bonds. Some mutual funds focus on buying IPO shares.
It is difficult for the average investor to purchase IPOs, as these shares are often reserved for institutional investors. As a result, retail investors often miss out on purchasing shares of new stocks at the lowest prices. Investors gain access to mutual funds through the actual mutual fund firm or via a stockbroker. Mutual funds sometimes close to new investors once the value of a fund reaches a certain threshold in an attempt to prevent the fund from growing too big to effectively manage.
An IPO price is established by investment bankers and company executives in the days leading up to the debut trading session. Once the stock begins trading, the IPO's price fluctuates in the course of the trading session based on the supply of shares and investor demand for that security. The net asset value, or NAV, of a mutual fund is typically determined once daily at the close of a trading session. It is based on a mutual fund's assets in relation to its liabilities.
Investors can learn about a company's sales and profits in addition to risks of an IPO in a company's prospectus. Companies file this regulatory document with the U.S. Securities and Exchange Commission in preparation for listing shares in the public markets. Mutual fund firms similarly file prospectus documents with regulators. In a mutual fund prospectus, investors can learn about a fund's investment strategy, the types of fees that mutual fund managers charge and performance history.
Given the difficulty for the average investor to obtain IPO shares at the lowest price, individual investors are often left out of the best profits. On average, IPOs generate returns of 18 percent during the debut session, according to a 2011 article on the "Kiplinger" website. In the subsequent three years, however, investment performance of these newly public company generally lags that of other small stocks. Mutual funds present their own set of risks. In the third quarter of 2011, even after the worst of the economic recession was over, stock and bond mutual funds declined 17 percent on average, according to a 2011 article on "The Seattle Times" website.
Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.