Initial Public Offering (IPO) is often looked at as a guaranteed money-making scheme. Every time a new offer comes out investors rush to grab a piece of the pie. It's true the hype created by the promoters, investment bankers and the brokers do help the stock to get considerable listing gains. Sometimes some companies get good listing value despite poor financials. But if we have to look beyond listing gains do IPOs give good long-term returns? It depends entirely on the financial standing of the company and how it figures in the peer group. Every new stock comes with a different story, a good company with solid fundamentals will perform well while bad companies will sooner or later come back to the price they deserve.
As a smart investor, it is important to look beyond the tall claims of the promoters and only apply for the IPOs which have good future prospects.
Most Of The IPOs Are Unreasonably Overpriced
People often think that an IPO is a golden opportunity to get stocks at cheaper prices. This might be true about some companies but the truth is that the most of the IPOs are unreasonably overpriced when they are offered. One of the reasons for bringing out an IPO is that investors of the company like venture capital firms who had invested in the initial rounds of funding the business get a chance to cash out some portion of their invested capital. Launching an IPO is a long process. There are several stakeholders involved in it like promoters, investment bankers and brokerage firms. They do their best to build a hype around their company. As a smart investor, you shouldn't buy their usual sales pitch of the IPO being "cheap and attractive". Remember, their interest lies in getting the IPO price that the promoter wants and then justifying the unreasonable price.
Most Of The IPOs Don't Deliver What They Promise
Always remember that the investment bankers and underwriters of IPO are just salesmen and the only objective of a salesman is to sell with total disregard for the value it brings to the customer/investors. Once you acknowledge this fact you will look at the entire process rationally.
Coming to the part of how an IPO fares post listing, the reason the whole IPO process is deliberately hyped up is to get as much attention of the investors as possible. As the IPO happens just once in each company they try to get utmost mileage out the promotional drive. Now imagine, if the company only on the basis of the hype is listed way above its intrinsic value it is bound to come down sooner or later.
Again, it's incumbent upon investor to ensure that IPO he/she is applying for hold bright future prospects. To understand the facts you have to study the IPO offer beyond its fancy claims. To put it simply, you need to get past the bright and glossy stuff and assess the offer on the basis of its fundamentals. many times investors fall prey to the herd mentality where they do a certain thing just because too many people around them are doing it. Therefore, concentrate on fundamentals of the offer.
Just Good For Post Listing; No Long-term View
The greatest attraction of any IPO is that it gives instant upside at the time of listing. It is true, even the most overvalued IPOs on most occasions succeed to fetch a higher list price. People who are looking for instant short-term gains in the period of few weeks or months often get that. However, investors who have a long-term investment vision for their investment are often disappointed by the performances of most of the IPOs. Most of IPOs underperform because they started off with high valuations which their business did not justify in the secondary market.