Many studies have investigated the benefits of purchasing IPOs, and the results might surprise you.
Despite the fact that new issues tend to be priced at a discount from the price that underwriters have decided is a fair valuation, their performance after the initial frenzy tends to be lackluster. While most investors think that IPOs are good investments, this is not exactly true.
There are IPOs that have doubled or tripled in price during the first day, and there are IPOs that opened trading below the original IPO price (and anything in between). For short term trading, it can go either way, but if the IPO is a “hot issue,” meaning that there are more indications of interest than there are shares to fill the orders, the average investor will not be able to procure IPO shares anyway.
The prices may spike with demand in the first few days, but the fires tend to go out after a few months. When the selling syndicate finally starts offloading their shares, the market will have more supply that it did before, and with less hype surrounding the company.
After an even longer period of time, some studies have found that the average IPO underperformed the market for up to 2 ½ years. While the IPO may seem like a very exciting opportunity, even several months out in the secondary market, there is still no evidence to suggest that these stocks are going to do any better than the rest of the stocks you could have bought.
Considering that these companies have no price history or publicly available company ledgers to compare their current performance with, they should be considered highly speculative.
Even if you find historical statistics suggesting that such-and-such strategy is sure to net you some huge gains with IPOs, remember that past performance offers no guarantee of future results.
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