Investing in initial public offerings (IPOs) might seem like an exciting opportunity as you will be one of the first people to own a stock when it hits the capital markets. But like other types of investments, IPO stocks can carry significant risk. For example, some companies that were unicorns during their days of being private may be hyped up before their IPO. Subsequently, when the stock goes public, investors buy the hype story and pour into the stock, propelling it upward. 

But momentum traders eventually exit their positions and book a quick profit. As the stock begins to crater, those who bought into the story, and not the business, are left holding the bag.  

Over the last couple of weeks two big-name tech companies hit the public exchanges: semiconductor company Arm Holdings (NASDAQ: ARM) and grocery delivery platform Instacart (NASDAQ: CART). Although both of these companies present interesting investment opportunities, there is a lot each needs to prove in order to earn a spot in your portfolio. Let's dig into why.

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Source Fool.com