Recently we’ve noticed a flurry of IPOs, with some getting over 100% return in the first few months of the listing. This puts forward a very interesting question on the table, Should you go for IPO’s?
You’ll find out everything you need to know here…and of course explaining to you my logic behind it. (Spoiler alert! Stay away from IPOs) 😛
Note: With September 2020 having 8 IPO offers, this piece of information will be very much resourceful to you, we’ll tell you how.
For the past few months, people across the world and even seasoned players are going for IPO’s. They are very clear that this is the easiest way to get profits QUICK. While I agree that you can get some decent profits at times….but what we tend to forget is that, that’s not the only case.
Okay, so I’ll explain what I mean. Now there are three reasons I will never recommend IPOs…
IPO trading price on the first day is dependent on the information we do not have (and will not have in the future too).
“The Information” I’m talking about is found in the grey market and on Big Institutional Investors CEO’s desk (Yup! That’s quite true). And there is a very high probability of us never knowing it. So what’s the point spending time on what we have no input right.
GIGO: Garbage In Garbage Out
With useless input (information) we will get a useless output (decision to buy or not).
The most simple and logical reason to believe that the IPO would have a bumper listing is by having a look at the subscription rate.
Btw this subscription rate of the company can easily be found out by a google search, and clicking on the news tab of google.
Higher the subscription rate, higher would be the trading price, right?
It makes sense, as high demand = higher price.
Also, the inverse is true, lower the subscription rate = lower the trading price.
Now tell me this…
Let’s assume you have applied for two IPOs. Company X has an oversubscription rate of 200x, and Company Y has an oversubscription rate of 5x. Now in which one would you have a higher chance to get the shares at IPO?
Company Y right?
But the problem here is that the probability of Company Y’s share going up is very low as the demand is extremely low.
Company X on the other hand will probably do well and you have a very low chance of getting the shares (as everyone has applied and shares are allotted randomly).
So the odds are simply against us.
Reason #3 (and the most important one)
IPO basically means that the promoters offer you to buy a stake in their company.
Now tell me this…if you were a promoter/owner would you sell your stake at an undervalued value (Hell no!!).
Will you sell your stake at the correct value (Still no).
You will only sell your stake at a VERY overvalued value. And that is exactly what an IPO is. Therefore the promoters have already absorbed the major appreciations that could happen in the share even before the first day of trading.
Now, do you understand why the ultimate objective of founding a company is to take it public?
It’s because they want you to pay an insane price for their company stake, and this is the main motive of every Angel/Private Equity Investor out there.
So what should you do?
According to studies, around 75% of the IPOs fail to deliver i.e. only two-three IPO’s out of 10 give you listing gains, rest tend to fail. This is certainly not a way to invest in stock markets.
CRUX: IPO rating from your broker or recommendation from your friend (yes! that’s a major source of IPO subscription) isn’t at all a metric to know whether the company will perform well on a listing day.
IPO is like a gamble linked with the lottery. No one can predict which IPO will go where. So your decision on investing in IPO will be based on a hunch.
Now the question is…how much you will be willing to invest in a hunch? Ask this question to yourself.
Investing in any commercial IPO is certainly your decision, but there is an inseparable mix of probability, news, and sentiments. To decipher this mix is done by the big hands because they have a much deeper knowledge of the company which is going to be listed.
Along with this, simple logic says that probably you will be losing money in IPOs. Maybe, you’ve made a lot of money in a few, but if you continue on with this, you will soon start seeing your portfolio in red (the law of averages never fails).
And if you still want to go for IPOs….then prefer the Government IPOs. They generally have a higher probability of going up (according to the past data)
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