Why New Retail Investors Should Not Buy IPO Shares

IPO’s or initial public (stock) offerings usually excite new investors. I don’t know why.

And the truth is, they also don’t know why. Perhaps they believe that asking their fellow investors “Is ABC, Inc. a good IPO company to buy?” will make them sound smart.

Now here are a few notes why you shouldn’t rush yourself into buying initial “barya” shares of these IPO’s:

1) These IPO’s will only offer you very limited number of shares through your stockbroker. Yes, you will not be able to become seatmates with Travellers International executives by buying their IPO shares equivalent to a minimum boardlot of common shares.

2)  Since they’re relatively new (as a public company), you barely know their financial condition or how they performed in the past. Therefore, you don’t have any basis at all to forecast if they will grow further at all in the future.

3) Only the big players benefit from “flipping” IPO’s. It’s an elitist move from these companies and their underwriters. Only those with millions/billions are given the chance to be richer buying and selling these IPO stocks.

4) Buying IPO shares on the first days or weeks is not ideal for long-term investors. Especially if you don’t know the background of that new company. You’re likely to buy it at a higher price. And if you are a daring day trader, you don’t have any clue as to when these IPO share prices will shoot up again after it crashes. Yes, IPO share prices do crash after several days and weeks or even months and years.

5) IPO share prices go up not because these companies are performing well during their initial public offering period but because they are nothing but “hype” only. When greed stalks in, active IPO traders will sell all their shares therefore causing its price to really go down.

7-4-2013 12-06-37 AM (CAL)

Calata Corp from IPO date and Year-To-Date (c/o Reuters)

But in fairness, there are very few IPO gems that performed well from it’s initial offer up to its normal trading days. They are hard to find though.

“I Love The Brand of this IPO, When Should I Buy Them?”

Wait until these companies show their performance in the market and how their business fare for at least one year. Observe and evaluate how they are able to handle the pressures of being a new publicly-listed company.

Meanwhile, stick to your old reliable blue chip stocks.

“Oh Okay, What’s an IPO Again?”

Haayyy.

Just watch the video below and let me know if you understood it by posting your comments.

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2 Responses to Why New Retail Investors Should Not Buy IPO Shares

  1. Carlos says:

    So True!

    A lot of people fail to notice that a lot of IPOs occur when there’s a bull run in the stock market. Which is not coincidental at all. The business owners want to take advantage of that to raise capital or at least share the burden and profit from their initial investment in the company. They’re not there to make other people rich.

    The only exception is when a company providing basic services (or anything actively choose to not live without) with a monopoly or overwhelming market share goes up for IPO. The owner might just be looking to profit, but at least the company looks like a cash cow and may be a blue chip in the making.

    Otherwise, it’s speculation. It may not be bad, if that suits the buyer. But at the very least, he should recognize that’s what he’s doing.