Are Initial Public Offerings Good for You?

Traditional and Dutch auction IPOs are now common and many investors are willing and eagerly waiting to profit from these opportunities. But are these IPOs really profitable?

Market statistics show that most initial public offers fail. This means that long-term holders of the stock lose their invested money. The most predominant reason for this is the poor performance of the company. Most companies going IPO are small but competing against well-established ones in the same industry. After a short-period of quick growth they fail in the competition for space. As the company performance diminishes, the stock price starts to fall.

Other companies won’t have a sound plan or enough resource for growth. They merely go public to raise some money. Poor management, changing relationships or legal formalities/problems block the firms from effectively implementing the plan if any.

Many public offerings are done during strong bullish trends where everyone is looking for a buying opportunity and is always willing to pay high. When the trend stops or reverses things change. The market forces never stay the same-- changes in economy, investor sentiments and financial rates affect stock prices, and prices of IPO stocks with low trading volume and high expectations show higher fluctuations.

In the early days following the IPO, there is high illiquidity in market for the stock. Market timing becomes difficult and short-sellers might find it difficult to borrow stocks from big shareholders. There are also chances of big price declines because of highly active short-covering by traders when the initial short-interest for the IPO fades. Similar selling-activity can also occur at the end of the lock-up period when large shareholders can sell their holding.

So, does any profitable opportunity still exist? The answer is always yes for the well-equipped traders. If you are a novice investor or not sure about the future of the company you are investing in, it is better to stay away from IPOs. ‘Buy early and sell early’ can be regarded as the best strategy for short-term traders. For long-term investors ‘entering and exiting at predetermined targets’ can be good as long as you are using good risk-minimizing tactics.