Buy SpaceX Stock on Day 1 -- But Only if You Can Answer These 3 Questions

It's finally here. In fact, by the time you're reading this, the long-awaited and much-ballyhooed initial public offering (IPO) of SpaceX (NASDAQ: SPCX) shares may be complete, with the stock now trading on the Nasdaq exchange. At what price it's trading is anyone's guess.

There's the rub, of course. It's statistically unlikely that you will be -- or were -- one of the lucky few retail investors able to participate in the actual IPO. That means your only option is to buy it on the open market, at the market price.

If you feel like you just have to, by all means, do so. Just make sure you're willing and able to honestly answer "yes" to these three questions first.

1. Have you actually read the prospectus?

In the same way that all publicly traded companies are required to file quarterly reports with the Securities and Exchange Commission to keep investors fairly informed, private companies looking to go public must also disclose key information in a form called a prospectus; you may also hear this document referred to as an S-1 registration statement.

They're hardly riveting page-turners. In fact, they're often rather boring, even for companies like SpaceX. Like every other S-1, SpaceX's prospectus is full of legalese, fine print, and boilerplate language.

You will find almost everything you'd reasonably want to know about the organization in this document, though, like how much revenue it generated last year, and how much money it spent investing in its own growth. (That's $18.7 billion and $8.6 billion, respectively, by the way. The rest you'll need to wade through on your own.)

And in this case, SpaceX also offers a surprisingly detailed look at the future size of the markets it intends to serve, such as artificial intelligence and orbital launches. (Spoiler alert: The numbers are well into the trillions of dollars.) There are even detailed looks at how some of its technologies work.

2. Are you truly prepared for the inevitable, extreme, and likely bearish volatility that awaits?

Most high-profile growth stocks are unusually volatile; this one isn't apt to be an exception. Indeed, given all the noise surrounding this stock and its impending public offering, SpaceX shares are likely to make investors seasick, right out of the gate. And this volatility could linger for a while.

Then there are unusual factors that apply here that typically wouldn't, like the tiered schedule for insiders to sell their stock. Normally, every initial pre-IPO stakeholder is required to hold their shares for 180 days after the public offering, but SpaceX's prospectus makes it clear that eligible early release shares can be sold 70, 90, 105, 120, and 135 days after the stock goes public.

It's not all bad. These sales will only be allowed to happen if SpaceX stock performs well early on. In that regard, regular investors and the company's insiders are in the same proverbial boat.

Image source: Getty Images.

Still, such sizable block sales could take a quick, unexpected toll on the stock's price as they occur, creating volatility that spurs more -- and sometimes misleading -- volatility.

(By the way, if you're one of the few investors who end up being allocated some of the shares initially being sold directly by the IPO's underwriters, your stake is likely somewhat locked up as well. In most cases, the participating brokers' "anti-flipping" rules require you to stay in this trade for at least several days if you don't want to lose access to future public offerings. It's certainly something to consider if you weren't planning on sticking with the stock for very long.)

Then there's the bigger concern. Most initial public offerings actually perform pretty well in their first few months. But trouble often begins several months in, after a couple of quarterly reports let early investors know whether their speculative bet on future performance was a good one. Numbers analyzed by brokerage firm Edward Jones, Nasdaq, Dimensional Fund Advisors, and LPL Financial all confirm that newly minted tickers are more likely to be down than up one year after their IPOs, and in too many cases are apt to still be in the red three and five years following their public offerings.

This makes sense, though. After all, IPOs are meant to raise as much money as possible while issuing as few shares as possible. That means their underlying companies are presented in the most bullish light possible, which may or may not last. It's a problem simply because it's never clear when a newly minted stock reaches its post-IPO tipping point.

3. Does this stock actually fit in with your portfolio and risk profile?

The prospect of a major move upward in any stock you own is certainly exciting. Just don't confuse excitement with an underestimated opportunity -- which is easy to do.

Here's a way to check yourself: If SpaceX shares had already been publicly traded for at least one year, would you still want to buy them at their IPO price of $135 apiece, or whatever price they're trading at on the open market following Friday's public offering? Be honest.

Here's another telling thought question: If you had to buy SpaceX right now and hold onto it for five years, would you still do it given its valuation of more than 90 times last year's total revenue? (For perspective, the S&P 500's trailing price-to-sales ratio right now is less than 4.)

These hypothetical questions seem to be giving plenty of would-be investors pause, forcing them to recognize they're mostly just trying to score a quick win with a post-IPO pop. They may well get it. However, while newly issued shares may be more volatile than most, the stock market usually finds a way to price them appropriately pretty quickly. Past that initial surge, it's still ultimately up to the company and its fundamentals to justify its stock's price.

This matters simply because, again, you could easily end up being stuck with SpaceX for a while...particularly if you're not a fan of locking in unrealized losses.

James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.