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1) If you are a small investor, like me, don’t bother to try to get an allocation. Those shares go to the big fish – underwriters’ best clients. And if you do get an allocation, it may indicate lack of demand and the stock may tank when it starts trading.

2) Unless you think it’s another Google or MasterCard, your best bet is typically small cap issues with a small float, preferably profitable. Avoid new issues that are repackaged old companies coming out of private equity funds. These deals are optimized by professionals to create maximum value for the fund investors at your expense.

3) Watch the pre-IPO pricing range. If the underwriter keeps increasing it, it indicates strong interest and oversubscription. You can also gauge demand by calling an underwriter and chatting up a broker. Your call will be routed to the broker of the day who is likely to be a rookie eager to build his book. You are his best prospect (a call in). He will tell you that you can’t get any shares but will keep you on the phone trying to get you as a client – use it to get the information you need.

4) Watch where the issue prices. If it prices above the range, you’ve got a hot IPO. Watch how the stock opens. NEVER put in a pre-open market order. It is tempting to get in ahead of the crowd but more often than not you will get filled close to the high of day as the initial order backlog creates a spike at the open.

5) Watch how the stock trades for a while. If it gaps up big time, there is a good chance it will sell off. If it opens close to where it priced and starts climbing, buy a small amount (some call it a “marker”) to establish a reference. NEVER buy your entire position at once.

The risk with IPOs is their unpredictability due to several factors.

a) You don’t know what the current holders’ plans are. It is safe to assume that there are a few flippers who will flip the stock at the open for a quick profit. But, again, you don’t know if they will flip the entire allocation or hold some for a higher price. The flippers provide immediate liquidity but their selling may create downward pressure if there is not enough demand to absorb the coming supply.

b) Many buyers in the open market are traders who are in for a quick profit. Their buying can drive the stock price up fast, but they are also quick to bolt at the first sign of trouble, leaving you with a sudden loss.

c) Not every institution gets an allocation. Many will be looking to buy but unwilling to pay YOU a premium. They will attempt to shake you out to create a discount for themselves.

d) Underwriters may initially support the price. When they finally pull the plug, the stock may sag.

The above factors make the stock’s moves in the first days and weeks of trading wild and unpredictable. You will never know what is going on, so your only (and best) option is to watch and react.

You can add on pullbacks or new highs, depending on the market, your cost basis, and the stock’s behavior. The key here is not to confuse this with averaging down or buying extended – something you should never do, IPO or not.

As the float gets redistributed, the stock begins to build a price structure called a base. This process may take anywhere from 1 to 6 months. It is generally safer to buy when the stock breaks out of its first base because it is past several major pitfalls.

- The people who know the stock best – the underwriters – are prohibited from promoting it for 40 – 90 days. When the quiet period ends, they may issue a rating or an opinion. Obviously, investors want to see a buy or a strong buy. But if an underwriter starts coverage with a neutral (read: sell) rating – beware! They must have a strong reason for pissing off their client. Sometimes just a lack of opinion (continuing silence beyond the quiet period) is enough of a warning sign.

- The company reports its first earnings as a public company. Investors clearly expect them to beat expectations. If the company disappoints – beware!

- The lockup period for insiders typically ends after 6 months. If insiders are eager to sell – beware!

After 6 months, these land mines will have been cleared. If the stock begins to advance, you may be in for a profitable ride.