At the high end of all bull markets, IPO’s start being sold like lottery tickets. The return on IPO’s is the same as lottery tickets – a couple of people win big out of millions of participants who win nothing.
IPO’s or initial public offerings are the issuance of new companies into the public markets by private investors. Many speculators come into the market at the late stages of an exciting bull market and Wall Street loves to sell IPO’s to this group. Speculators are usually there because they see the market as a “get rich quick” scheme. Unfortunately, most just get their money taken.
The vast majority of IPO’s go down the tubes, but Wall Street loves these because they make rich fees from them. Wall Street knows the speculators are out in full force at the height of a bull market and view them as “shooting fish in tank”. It is precisely the time where those speculators are approaching the market like a gambling casino. The return at the casino is similar to IPO’s. Both groups of participants lose their money.
An interesting question is “Why do private companies sell into the public markets?” If the companies were so good, why would they give away part of their company by selling shares? Well, they do it because the getting is good. The shares are sold at highly inflated prices which is good for the private investors, but very bad for the IPO buyers. The private investors can get their funds back, receive unbelievable returns and, often, still control the company. Very few private investors would sell if the business was very profitable, but the inflated prices the private investors get for the shares is way too much of an incentive.
Worst still about IPO’s is that most are showing huge losses when they are sold publicly. Most speculators don’t even bother to read the prospectus (a document all about the company and its business) for the offering. The speculator sees it much the same way as people who are engaged in house flipping. Anything that appears to be too easy to earn huge amounts of money is an illusion. If you have tried house flipping, you know how hard it really is. Often several months after the IPO, the share values plunge. Wall Street raked in their fees and private investors made fantastic money. The speculators get their _ss handed to them.
So forget the get rich scheme of IPO’s. There is no easy money for IPO buyers. Don’t speculate, invest. Invest for the long term. You can’t beat Wall Street at the short term myopic trading game. Many have tried and most have failed.
