Investing in initial public offerings (IPOs) can be a lucrative opportunity to make money in the stock market, but it also carries risks and misunderstandings that require careful consideration.
Misconceptions about IPOs can lead to unwise investment decisions and financial losses. This is why it is important for every investor to distinguish facts from fiction when investing in an IPO.
Although buying IPO stocks can bring profitable returns, investing in IPOs require patience and a long-term perspective. If you want to succeed in this approach, you must get to know the company well by doing proper research.
You can do this by reading the prospectus of the IPO where you can find latest financial reports of the company, as well as its plans in the future. By doing this, you will be able to assess the company’s financials and growth prospects.
Investing in IPOs should be viewed as part of your overall personal financial plan. It is important that you evaluate your financial goals and risk tolerance before deciding on how much money you are willing to invest.
When you understand the realities and myths of IPO investments, you will have a higher chance of surpassing market expectations and achieving your financial objectives.
What are the common misconceptions surrounding IPO investments? What steps can you take to minimize the risk of making unfavorable investment decisions?
Here are the top five myths that every investor should be aware of and some helpful tips on how to capitalize on IPO investments to generate income.
Myth #1: IPOs always make money
It is a common misconception that investing in IPOs is a surefire way to make money. However, this is not always the case. While some IPOs can skyrocket in value, most IPOs underperform or even lose value.
If we will look at the IPOs last year, eight of the nine IPO stocks ended the year with losses. These stocks were Balai ni Fruitas (PSE: BALAI), -17 percent; Vista REIT (PSE: VREIT), -5.7 percent; Raslag Corp (PSE: ASLAG), -17 percent; CTS Global (PSE: CTS), -4 percent; Bank of Commerce (PSE: BNCOM), -34.3 percent; Citicore REIT (PSE: CREIT), -10 percent; Figaro Holdings (PSE: FCG), -16 percent; and Haus Talk (PSE: HTI), -28 percent.
The only IPO that managed to end on a positive note in 2022 was Premiere Island Power REIT (PSE: PREIT), which gained by 6.7 percent.
Buying an IPO at offering price does not mean you are buying it at the lowest price. The offering price of an IPO is simply the value that the owners of the company are willing to sell to the public. You may or may not agree with the price, depending on how you would evaluate the merits of the offer
IPOs can be volatile and unpredictable, especially during their first few months of trading. It is important to do your due diligence and study the company’s financials, management team, and industry before investing. Additionally, it is crucial to have a long-term investment strategy in place to ride out any potential volatility.
Myth #2: IPOs are always underpriced
IPOs are perceived as inherently good investment opportunities because they provide the investor the chance to buy the stock at the “ground floor.”
Sure, there have been IPOs in the past that have doubled or tripled shortly after listing but there are also many newly listed stocks that went downhill right from the start.
One case example of this is the IPO of Medilines Distributor (PSE: MEDIC). When MEDIC was listed on December 2021, it opened immediately at a loss of 13.5 percent from its IPO price of P2.30 per share. The stock was bombarded with heavy selling on its first day, ending the day with 30 percent loss.
Since its listing date, MEDIC has never recovered as its stock went on a downward trajectory until today (end-February 2023) at P0.68 per share, representing a loss of 70 percent in value from its IPO price.
While it is true that some IPOs are underpriced, meaning that their shares are priced lower than their perceived market value, not all of them are.
Also, underpricing an IPO can also be a sign of weak demand for shares, which may not bode well for the company’s future performance.
We need to remember that underwriters and issuers price their IPOs based on investors’ demand to make sure the final offer price is aligned with market expectations. When sentiment is low and there is high uncertainty in the market, IPOs tend to be underpriced. Click here to read more