How do you determine if an IPO is worthwhile or not?
To know if an IPO is interesting and therefore if one should participate or not, it is necessary first of all to be able to know the growth potential of the company that puts its shares on sale.
For this, it is necessary to take note of various information such as the company's quarterly performance reports which are compulsorily made public before any IPO. It is also possible to consult the S-1 report which is the mandatory report before an IPO. However, this report contains only limited information and most often only concerns a few years of financial year, regardless of the age of the company.
As a retail investor, you will not have access to the same data as financial institutions, which can, for example, benefit from face-to-face meetings with the managers of these companies before their listing. However, it is possible to get an overall idea of the growth and development prospects of these companies by consulting all the data available online and the opinions of analysts.
In any case, before you decide to participate in an IPO, you should be careful not to be influenced by the high media profile of some of these operations, which is only intended to generate appetite.
How do you participate in an IPO?
Now let's get down to business and find out how to participate in an IPO and therefore how to buy shares in a company that is going to be listed on the market.
There is a notable difference between the treatment of institutions and individuals. While institutions can buy the shares at the starting price indicated by the company, individual investors often do not have this opportunity, especially when the IPO in question is highly anticipated. As a result, private investors often pay more for their shares than the price that was initially announced.
In any case, the earlier you take a position in the IPO, the cheaper your shares will be. Most investors prefer to participate in IPOs early in the process because during the first trading session, volatility is often high and the price of a stock can rise very quickly.
Irregularities in the performance of newly listed shares:
Another thing to know about IPOs is that newly listed stocks often have a very uneven performance.
If we look at the performance of IPO stocks in recent years, we see mixed results. Worse still, the underperformance of these stocks is often greater than the overperformance in the medium term, i.e. in the two years following the IPO.
Before investing in an IPO, it is therefore necessary to be prepared to keep this investment over the long term before seeing a real trend emerge and to accept the high volatility that will impact the stock during this period.
Therefore, it is up to you and you alone, depending on your strategy and your investment horizon, to decide whether or not you wish to participate in an IPO. Remember that the risks are often greater than the returns if you are considering a short-term investment. Remember also that your decision should be made after having obtained as much information as possible about the company carrying out the IPO and enabling you to assess its real long-term growth potential.