Why an investor should avoid IPO investing

I have found some of my colleagues and friends are curious to buy IPO’s (Initial Public Offer) than buying stocks from secondary markets with proper price. Another common error I found that, they are falling into the trap of new companies, who entering to the market with highly priced IPO’s at the bull phase.

If you are a regular IPO investor or interested to subscribe shares through IPO only, remember, there is enough room for errors to lose your money. This article showing lights to the possible errors with an intention to provide necessary knowledge to readers to avoid IPO’s.

It’s a known truth, companies always entering to the stock market with IPO’s, ONLY at the bull phases. A bull phase ensures 100% subscription of their IPO’s; with whatever price tag they have given. Happy public generally subscribes such IPO’s blindly, by considering the short term profit they are going to get at the time of listing. Such people never interested to know the real value of a company or the suitability of buying price. This behavior generally found among the traders with short term focus. An investor, who likes to invest by following public behavior or tips or analyst reports, generally fall to this trap by buying overpriced IPO’s. But later, once after stock market starts going through the bear phase, prices of these companies immediately reach to the bottom line to give them huge lose.

As a real value investor, how you can shield yourself from such lose?For a long term focused value investor, it is better to avoid any new IPO’s, entering to market with a focus of taking full advantage of going bull phase. Companies generally have high price tags to get benefited from bull phases and greed of public.

As a new company, it is difficult to get necessary information that help any true value investor to take decision, whether he need to invest or not. This is due to the unavailability of most required data to analyze the investment suitability by considering the Buffet’s theory on company business, management and financial performance.

If you watch carefully, IPO’s are generally entering to the market at the bull phase only. Future listing prices of such IPO’s will be higher than the offering price. Such situation put any ignorant investors to a tendency to buy more stocks. They are not aware, such temporary price boom happening due to the effect of on going bull phase but, not from the support of strong fundamentals.If a company, whether it is fundamentally strong or weak, listing to the market at a bull phase, possibility get enough attention from public and thus huge price boom is possible. This can be supported by possible extra ordinary trading activities at the time of Bull run and by the greed of public with short term focus. Once the market steady and after turning to bear phase, prices of such stocks will be crashed and reach to the bottom line and investors start suffering from huge lose. If a company is not fundamentally strong enough, investors going to lose the total amount they used to invest through IPO’s.

How can we shield ourselves

from such pathetic situations? At very first, try to understand the company well. If it is from a fast booming sector like IT, real estate or construction, the risk of losing money will be high.

Second, identify its fundamentals. Is the company is just a franchise or managing by capable people? Try to get maximum information on its past performance. As a new company, it is a difficult task, getting all required data to analyze the soundness of a company. If you face such situation, keep the company in the queue for some more years, till you are able to identify its real value. Never invest to any new companies on hot tips, rumors or believing analyst reports.

I found another common dilemma among new companies, they might be having strong order book but, if you look into the part of required capital, it would be a big zero. Such errors can lead a company to huge debt later.At final, it is better to avoid investing to new IPO’s by considering the heavy fog that preventing us to identify the real value value of a company against its given price. Be wise and intelligent with your selection criteria and circle of competency. Best wishes


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