Retail investor participation has skyrocketed across the world as seen with the surge in accounts at Robinhood and Zerodha alike. With the stock market’s potential for wealth creation, it is indeed a good development, especially given the younger demographic of new investors, starting early in their financial planning. However, given the excitable nature of the markets, investors get into a frenzy that often ends up defeating the whole purpose of long-term wealth creation. There is dire need for educating investors in their stock market pursuits. Safal Niveshak is one such website which does a great job of it. In this timely piece, Vishal Khandelwal highlights the pitfalls of IPO investing. Special thanks to an Indian stock market veteran who shared this with us suggesting the importance of taking this message to as many as possible.
“People indulging in the stock market are often people with a lot of emotions. They get excited by something new, especially if it holds the promise of making them a whole lot richer and provides bragging rights at their next social gathering.
Maybe that’s why amateur and professionals alike tend to lose their minds in bull markets, particularly when a hot initial public offering, or IPO, is offered to them by their broker.”
He quotes Ben Graham to show this is an age old phenomenon of the stock market:
“In every case, investors have burned themselves on IPOs, have stayed away for at least two years, but have always returned for another scalding. For as long as stock markets have existed, investors have gone through this manic-depressive cycle.
In America’s first great IPO boom back in 1825, a man was said to have been squeezed to death in the stampede of speculators trying to buy shares in the new Bank of Southwark. The wealthiest buyers hired thugs to punch their way to the front of the line. Sure enough, by 1829, stocks had lost roughly 25% of their value.”
The article has many more bytes about how and why more investors lose money in IPOs than those who make. But the central point of the piece is the asymmetry of information and conflict of interests between the sellers (company and bankers) and buyers in any IPO.
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