IPOs are widely pursued as high-return and high-risk investments. They appeal to investors and traders looking to earn high returns and a stake in a successful company. IPOs, however, are surrounded by numerous myths that affect investor’s strategy.
Due to the rising interest in IPOs, these myths and misconceptions related to these financial occurrences are important to debunk. As an investor, it will help you make better IPO decisions.
Debunking Common IPO Myths
Here are the main myths and misconceptions that surround IPO which you must know as an investor:
Myth 1: IPOs Guarantee Massive Profits
Among the common misconceptions regarding IPOs, one of the most widespread is the belief in lucrative returns. Although there are cases where an IPO shows huge first-day gains, this is not always the case. In the real world, however, IPO performance can either be full of gains or losses.
While some IPOs can generate positive short-term returns, many of them end up underperforming the market for a long time. Investors tend to overlook the fact that these types of investments come with some risks as any normal investment type.
Fact: IPOs can be High-Risk Investments
The allure of getting rich overnight tends to overshadow this reality. When a company goes public, it may not be very mature and, therefore, may need to demonstrate the ability to generate profits. Thus, investors need to understand that they are investing in the possibilities more than guaranteed results.
This can result in fluctuation in the price of the stock soon after it goes to the public market through an IPO. Although IPOs could be financially rewarding, they involve high risks, and therefore, researching and evaluating possible risks should be done before investing in them.
Myth 2: IPOs Are Only for Big Investors
One might assume that IPOs are only available to institutional investors. Even though institutional investors get high-grade pre-emption because of their buying powers, individual investors can also invest in IPOs.
This has been made possible by advancements in technology and the availability of online brokerage firms through which retail investors can participate in an IPO. Indeed, some companies also allocate a certain percentage of their Initial Public Offer shares to retail investors in order to make these investments accessible to the general public.
Fact: Retail Investors Can Access IPOs
Historically, IPOs were not very easily accessible for the retail investor or for the small investor. However, Demat accounts have democratized investing and made it possible for the average person to be involved.
Myth 3: IPOs Are Always Overpriced
Some people think that IPOs are always overpriced because companies usually latch on to enthusiasm to set high valuations. Even though it is apparent that some firms have in the past overpriced their initial public offerings, this is not always the case.
The calculation of the price at which an IPO is issued is greatly influenced by factors such as market forces and demand in the market. The idea is to offer the shares at a reasonable price that is in line with the value of the company, and at the same time, there should be a demand for the shares.
Fact: Pricing Reflects Various Factors
Underwriters are involved in setting the price for the IPOs. They put an economic value on the shares by evaluating the financial condition, the prospects of growth, and the state of the market. Besides, the book-building process assists in determining the level of interest among investors, which serves as another criterion to determine the right price for the shares.
However, mispricing can occur, especially during volatile periods. Basically, the process of IPO seeks to issue security at a fair value to both the company and the investors.
Conclusion
Every investment has its myths and misconceptions, and the Initial Public Offerings are no exception. Despite the many opportunities that they present to investors, they should be approached with the knowledge of the risks and the facts that come with the venture. Disapproving these myths can assist investors in making correct decisions and succeeding in the IPO market share business.
A Demat account is crucial for IPO investing, but the charges associated with it greatly influence returns. This is why you must choose the best stock broker that facilitates free demat account opening online. It should also offer a tech-driven investment platform that offers updates on the best ethanol stocks in India, among other industries.
