Jul 22, 2010

IPOs-Some Most Important Things to know about

IPOs only and only come in hot and bull market. Why? So that they can obtain the highest price.

Investors forget that Merchant Bankers are selling agents of the issuers. And many times they are also given extra fee for performance selling over and above fixed fee.
Merchant/Investment banking is a cream business. So many are in race to get mandates for IPOs from issuer companies. They will do everything to please the company.

SELL ON LISTING? If you’re lucky enough.
Most investors have only one funda for investing in IPOs.
To sell on listing!
They all think that they will be able to sell and outsmart everyone else.
They all feel so because of psychology. They have seen some issues listing at high premium and their listing premiums quoting in so called ‘gray-market’; and this brings the representative bias. The availability bias makes him confront only good and positive news and information. They ignore the discounted/failed listed IPOs. And in hot market there is all news of economic growth as well.

New sectors are not invented every now and then: The fad and fancy for ‘new’ in markets:
Many IPOs come which are highly pricey and shares of some peer company are already available in secondary market. Still investors buy/subscribe to such IPOs. Because they have tend to believe that (in bull market) ‘IPOs are a sure thing”, which is surely a misconception.

This is a fact that investors have lost more money and taken a hit on the return on their capital. Investing in IPOs.

Many investors buy stocks on listing day. This is another mistake the investor can make. If one is not allotted shares in IPO than one tries to buy it on listing day and try to become the proud owner. So what if he didn’t get allotment?
Observe yourself and you will every time find that your obsession for buying the new kid on the block or IPO of any stock is only due to one or more bias out of ‘availability bias’, ‘recency effect’, or ‘representative bias’. The Availability bias happens due to hoard of available information/recommendation etc. on the new IPO. You see hoardings advertisements, IPO forms at your brokers’ place, advertisement in blue channels and news papers, chats and recommendation given in all this medias as well. Thus you are provided with constant ‘available’ information/input load about the new IPO. The ‘recency effect’ deceits you by way of others making you believe or you making yourself believe that some recent xyz listed IPO got good gains on listing. And interestingly the ‘recency effect’ works on one way straight at a time. In that it you only look at successful IPOs on lusting and even though there may be fair number of IPOs listed on discount, it will not consider them. Strange but true! The successful IPOs become ‘representative; of all the following ones.

Investors and money managers, advisors and brokers put a lot of emphasis on PE and other ratios and financials etc. parameters when it come to investing or judging listed (old) stocks. But HOW THEY TEND TO OVERLOOK ALL THESE FOR AN IPO STOCK IS a matter of astonishment! Why do not they employ similar rigour while looking at or advising on IPO stock?

For e.g. Power grid Corp gave 50% gains on listing. But this doesn’t mean that all government companies’ IPOs give good returns. Or power companies are good and give good returns.
If/when investors think so then they are playing pray to ‘representative and availability heuristics’. They are plagued with Recency bias.

Investors with a clear goal of making money on listing must bear in mind that it is most of time a luck game with IPOs. Remain ready to face loss and a hit on return on capital in case you hold on to the stock.
Analyst recommendation or so-called ‘gray market premium’ could only enforce your confirmatory bias and representative bias.
Subscribing on borrowed money is another sure way of burning hands in stock-markets.

If you like some company then you can wait for its listig. After listing let the stock price stabilize and excesses ease out. Let the emotional euphoria fade and cool down.
If still the stock price is available at high valuation such as it could hit your long-term return then wait for bear market. You will definitely get your preferred price of acquisition.

An analysis of past data of IPOs suggest that few IPOs have been able to give good long-term returns and in some case outperform the markets.
In most IPOs investors have taken a hit on long-term return of their capital. We don’t say that all IPOs are bad. At the same time maintain that investors should avoid most of the IPOs for secondary market.


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