Did you get in on the Coinbase (COIN) IPO?
Yesterday, Coinbase listed its stock on the Nasdaq exchange and began trading as a public company.
For the first time, individuals like you and me can now buy shares of the cryptocurrency exchange platform.
Late Tuesday night, the Nasdaq gave COIN a reference price of $250, which was basically a placeholder for where the stock might start trading once shares become available.
That reference price values the entire company at just over $65 billion, placing Coinbase among the most valuable companies on the market.
The night before the stock started trading, I got an excited text from one of my running buddies. It simply read…
“COIN tomorrow! You in??”
This is definitely one of the most exciting new stocks we’ve seen hit the market.
And I’m sure many of our readers can’t wait to pick up some shares. (Maybe you’ve already bought some shares. If so, send me an email and let me know!)
Today, I want to give you some background on how these new stocks trade.
I hope that you’ll be able to make a lot of money (and avoid some key risks) with this exciting new play.
A Predictable Path for New Shares Like COIN
When I was a hedge fund manager, one of my primary jobs was to handle all of the new IPO trades for our fund.
Since we did a lot of business with major investment banks (like JPMorgan, Credit Suisse, Morgan Stanley and Merrill Lynch), we usually got shares of hot new stocks before they started trading on the public markets.
During that time, I learned to watch these new stocks carefully. And I picked up on some consistent patterns that can help you make reliable profits.
If you want to make money from new stocks like COIN, it helps to understand who’s actually trading the stock and what their motivations are.
To start, let’s take a look at who actually owns Coinbase (or owned it before the stock was listed).
The company was founded by Brian Armstrong, an entrepreneur who is still the largest shareholder in the company.
Since it was founded in 2012, the company has received multiple investments from private equity firms, investment banks, wealthy investors and even the New York Stock Exchange.
Many of these investments were made when the company was very small and just starting to build its customer base.
So this week as the stock started trading and the company was valued in the tens of billions of dollars, these investors have huge profits on the books!
It’s natural for many of these investors to sell some (or all) of their shares whenever a stock like this starts trading.
This is especially true if the stock is wildly popular and there’s a crowd of willing buyers just itching to get their hands on this stock.
Quite frankly, it would be irresponsible if these founders and early investors didn’t take some of their profits off the table by selling shares to an eager public market.
And that’s where the risk for these new stocks comes in…
Sell the Hype, Buy the Dip
When shares of a popular company like COIN first start trading, and individual investors like you and I have our first chance to get in, the excitement can be overwhelming!
It’s not uncommon to see a new and exciting stock like COIN more than double in price on its first day.
So what’s not to love?
The problem arises when those early investors decide to pull the trigger and sell some of their shares.
This selling can send shares lower and kick off a mini-panic.
Think about the new investors who watched the new stock start trading… watched it move higher… and then finally felt comfortable enough to buy.
Once the insiders start selling, these rookie investors will see their position trading lower and start to worry.
And at some point, these investors ultimately give up, throw in the towel and sell.
It’s a pattern that I’ve seen repeated over and over. And it can cause a lot of heartburn if you get into a popular new stock at the wrong time!
Of course, this doesn’t mean you can’t make money buying shares of COIN.
The stock could keep trading higher from where it is today. And with all the hype surrounding this particular new stock, it’s tough to know the precise timing of this pattern.
If you’ve done your homework and you know that you want to be invested in this cryptocurrency play, I’ve got a suggestion for how to build your position…
Dollar-Cost Averaging — With an Emphasis on Pullbacks
If you want to build a position in a stock but you’re concerned with the potential for a pullback, there’s a very easy strategy I’ve recommended here at Rich Retirement Letter in the past.
It’s called “dollar-cost averaging”
The idea is that you start by deciding how much you want to invest in the name. Maybe it’s $100, maybe it’s $1,000 or possibly much more!
From that point, you divide your investment into a few different pieces. So you could split your $1,000 investment into five different “buy orders” of $200 each.
You can go ahead and invest your first $200 right away. This way, if shares of COIN rocket higher and just keep gaining momentum, you have at least some of your cash invested.
Then you can schedule the other four investments over the next few weeks (or months).
For a new stock like COIN, I’d prefer to stretch the payments out over 3 months as it may take a while for the insiders to sell the shares that they want to get rid of.
The beauty of this setup is that you don’t have to worry if the stock pulls back.
A pullback for COIN may cause your first investment to lose money.
But since you’ve got four more purchases to make, you’ll get a better deal for the rest of the shares you buy.
Meanwhile, if the stock continues to rocket higher, you’ve at least got some of your money invested and can watch your wealth grow.
Since most brokerages now allow you to buy fractional shares, this dollar-cost averaging is even easier!
You don’t have to buy one or two shares at a time and average your investment up or down.
Instead, you can simply buy $200 worth of COIN and your broker will give you the proper fractional amount of shares to give you $200 worth of the stock.
If you do decide to take this approach with your COIN shares, I would appreciate it if you kept me in the loop!
I’d love to hear how this approach is working out for you. Just send me an email at RichRetirementFeedback@StPaulResearch.com.
Or if you’re on social media, you could also send me a Tweet!