scorecardresearchThe 5 biggest myths about investing in IPO

The 5 biggest myths about investing in IPO

Updated: 24 May 2022, 06:08 PM IST

Investing in an initial public offering (IPO) is akin to placing a bet on the future of an enterprise. In the market, there is often a lot of noise, and not everything is true. We debunk some popular IPO myths and offer helpful IPO investment advice here.

There are a lot of myths when it comes to Initial Public Offerings, we debunk some popular IPO myths here. 

There are a lot of myths when it comes to Initial Public Offerings, we debunk some popular IPO myths here. 

There are a lot of myths when it comes to Initial Public Offerings, as IPOs in general a very sceptical topic for investors because of a lot of reasons to name a few will be lack of understanding for a layman, high uncertainty, good amount of research time for making an informed decision etc.

Below are some myths related to IPOs:

Myth 1 - Company going public which makes it financially stable

It is often assumed that the company who is going public must be financially stable but the statement is not true. A company decides to go public because it wants funds for carrying out activities.

Though it can be said that the company who is offering IPO would use the funds raised for expansion, growth, mergers and acquisitions which can lead to financial growth in a much larger scale than before which would definitely be gainful for investors.

But if the fund is being raised for paying only the debts then the company is definitely not financially stable nor will it provide much gains to the investors.

Myth 2 - Individual Investors are awarded with IPOs

The above statement is very rarely true. The reality is that institutional investors are the primary investors, they are the ones who purchase multiple stocks at once. Usually people who underwrite the company who has decided to go public want to give primary chance to institutional investors as they underwriters want the investors to hold the shares rather than sell them in the open market, with price volatility.

Therefore, when a big multinational decides to go public there are not enough shares for both institutional or individual investors, because of which individual investors may have to wait in the secondary market, where securities are sold after IPOs.

Myth 3 - Investment in IPO gets me on the ground floor

The above statement is partially true. The company before going public, tries out private investment. Therefore, investors investing in IPOs are not the ones with the access in the very first place, on the other hand they are called first public owners.

There is always a difference between IPO offering price and price of what individual investors will pay in the stock market. The price of public offering is decided much ahead in time for institutional investors, owners and some investors who come under certain eligibility criteria.

Myth 4 - All IPOs are high risk, high reward

The above statement is not true under all circumstances. The key to find whether a particular IPO for a certain company is profitable or not is only research and scepticism.

It is not always necessary that hype companies give high rewards on IPOs, sometimes companies who do not have a much bigger name do pretty well as their business model and other factors are at the stronger levels and have a scope for improvement.

Myth 5 - IPOs outperform their peers

It is said that IPOs offer something new, fresh to investors which shows great potential and is believed to give good return to the public, while the fact says otherwise. It is researched and backed by the statistics that IPOs have narrowed their performance over the years than their peers like equity shares or mutual funds etc.

Rushing in the decision of buying IPOs should not be followed. Reassuring every step is a must, sometimes it does happen that the company which was hyped a lot before going public does not do well and the investors do not gain the reward they anticipated.

With the increase in technology and information a lot of pros and cons have been listed for new investors which can be looked over before investing and thus making the myths vanish and resulting in a rational decision.

We explain here how to find a good IPO to invest in
First Published: 24 May 2022, 06:08 PM IST