Avoiding these 7 classic IPO mistakes
- Since initial public offerings (IPOs) are a part of the primary market, the aphorism attributed to Warren Buffet is applicable to them as well. However, investors, especially novices, often fall victim to the many additional traps that exist in IPO investment. Investors make these readily avoidable yet typical IPO blunders whether they are aware of them or not.
- If you know what you’re doing, investing in the stock market is a great way to amass a substantial fortune.
- But if you don’t know what you’re doing, or if you make bad selections, you might find up in a lot of financial difficulties if you lend to people.
- Here are some typical errors made by investors; if you recognize yourself in even one of these, you need to take immediate action to salvage your financial future.
1) Buy Stocks Just Because They Are Cheap
Buying cheap and selling expensive is a frequent strategy in the stock market. Remember, though, that a stock’s low price does not automatically make it a good buy. The hefty price tag doesn’t necessarily indicate a poor investment. You should buy stocks after determining whether or not their current price represents a good value based on analysis of their market capitalization and price to earnings ratio. Find out if you’re getting a decent deal using this formula.
2) In the footsteps of a well-known investor
Lots of individuals believe that if they just do what the famous investor did, they will have the same results. Be wary if you fall into this camp; there is no assurance that they will be correct, and even if they are, you have no idea what technique they are employing, so you could lose money if you sell or purchase at the incorrect time. You can avoid disaster by watching them closely but not imitating them.
3) Not devoting enough time to investigation
However, some people choose to rely on the expertise of their peers rather to put in the effort required to form their own opinions. Your pal may be correct, but what if his plans and ideas backfire? Friends can be a great resource for learning new ideas, but if you’re serious about making money, you need always conduct your own due diligence.
4) Failing to seize opportunities presented by difficult times
In order to avoid losing money, some people avoid the market entirely during recessions, even if this can cause them to miss out on promising chances. Keep in mind that there are cyclical changes in the economy. A boom is followed by a recession, which is in turn replaced by another boom. During a recession, investors can seize lucrative opportunities. One should not blindly follow the herd into the market during difficult economic times.
5) Blindly following a broker
Even the broker can’t see into the future because he or she is only human. Possibly, but not usually, he is correct. You should take your broker’s advice into consideration, but not blindly implement it. Ask your broker plenty of questions to ensure you fully understand the situation.
6) purchasing shares of stock right before a dividend is expected to be distributed.
Typically, dividends are how a successful company distributes its earnings to its shareholders. In general, dividends are beneficial, but it’s not a good idea to actively seek them out. Many investors make the mistake of purchasing shares of a company’s stock right before they expect the company to distribute a dividend. This is because the anticipated dividend is factored into the purchase price of the shares, causing the buyer to spend more overall. In order to avoid this blunder, investors should have a diversified portfolio in which some of the stocks will pay dividends while others will not. You’ll be able to see that your portfolio contains both safer, dividend-paying blue chip equities and riskier, perhaps higher-returning speculative securities.
7) not accounting for costs
There are those who deal excessively in the market. They may be well-versed in the trade, but they are blind to the opportunity costs involved. A low margin increases the risk that your profits may be eaten up by transaction costs and taxes. Because of this, you should be conscious of the costs and taxes but not let them dictate your trading decisions.
It’s true that the best way to learn how to trade stocks is through trial and error, but you may limit your losses by avoiding the common pitfalls discussed above.
Putting too much stock in the shadow economy
- It’s important to keep in mind that the grey market, despite its potential usefulness in determining listing prices and interest, is ultimately an unofficial system. When markets are steady, it’s trustworthy and predictable, but when volatility rises in the secondary market, it becomes unexpected and unreliable.
- The grey market is susceptible to manipulation and has already disappointed investors, much like other unstable markets.
- Some application-buying dealers and brokers haven’t followed through on their promises. Although it would be unwise to make financial decisions based simply on GMP, an astonishing number of people do just that every day. Thus, it ranks first among the most frequent IPO blunders.
Assuming the same course as the majority
- If the firm works in a market or segment that you are unfamiliar with, the fact that all of your friends are excited about the IPO is not a good enough reason for you to join in on the excitement. Despite the fact that most IPOs are oversubscribed during bull markets, not all of them end up being profitable.
- There have been multiple initial public offerings (IPOs) in the airline industry since the 1990s, when the government deregulated the industry. Organizations like NEPC, Damania Airways, and ModiLuft were mentioned. Within a few years, they had all disappeared without a trace.
- Although it is challenging to go deep and eliminate organizations and business concepts that aren’t viable, there are workarounds available. Here, you can benefit from the objective analysis and research findings provided by our dedicated research and analysis team.
Getting caught up in trends, manias, or bubbles
- Adding this to our list of typical IPO blunders. A lot of times, investors are betting on something that isn’t a theme but a fad (remember power and infrastructure in 2009?).
- In a similar vein, markets can experience periods of euphoria that cause investors to lose their cool. Considering how unrealistically high current valuations and expectations are, now is not the time to make any investments.
- Former CNBC analyst Ron Insana argues in his book TrendWatching: Don’t Be Fooled by the Next Investment Fad, Mania, or Bubble that fads and bubbles play a significant role in the historical repetition of patterns.
- So, investors can avoid losses by keeping an eye out for these red flags and selling out before the bubble explodes. We completely concur and have been sounding the alarm about the dangers of overpaying for an initial public offering. For this reason, you may put your faith in Insana’s counsel: he has tried his hand at capital management on a few occasions and failed miserably.
Using data from subscriptions to make the decision
- As was said above, if someone is smart, he or she can tune out the noise from people who don’t know as much. But there is another trap in the form of subscription data, and investors often pay more attention to subscription data than to the company’s fundamentals.
- In other words, it’s a continuation of what we saw above. Let’s not forget that subscription is easy to manipulate and often shows how investors think like a herd. Don’t forget that Reliance Power’s IPO, which was one of the biggest in India, was fully subscribed within minutes of going on sale and still holds the record for the most money subscribed. Everyone knows what happened to investors after that.
- In the same way, you should be careful if high net-worth individual (HNI) investors are interested. HNIs are some of the most important people in the grey market, and they often apply for leveraged IPOs.
- This means that HNIs have to pay more interest for every extra day they keep the shares. Because of this, they tend to sell on the day they are put on the market, and if the listing is bad, there is more pressure to sell. By following and focusing too much on HNI subscriptions, retail investors put themselves at risk of volatility on listing day without knowing it.
Choosing to ignore your comfort zone
Every investor who has been successful in the markets for five years tends to develop a set of beliefs about how to invest, whether they are aware of it or not. This means that a person gets to know and feel comfortable in a certain industry. Even though this learning may be vague and intangible, it helps define one’s comfort zone and, to some extent, their level of competence. It also often helps people avoid making IPO mistakes. Getting out of this range could be risky for investors if the market goes down.
Overestimating how long you can stay
- Another important barometer is a person’s ability to stick around, which needs to be taken into account along with their comfort zone. This is a big part of investing that has to do with how people act, and it’s not unusual for even well-informed investors to sell at lower prices when people are panicking. Again, Buffett’s advice is very helpful, and he suggests investing in businesses that will be doing well even if the stock market is closed for 10 years.
- This isn’t just one of the many mistakes made during an IPO. It’s a much bigger problem with the way assets are being used. Investors often overestimate how long they can stay in the market or in certain stocks because they invest all their extra money. When markets go down, investors can’t take advantage of lower prices because they don’t have enough cash on hand. They also have trouble meeting their other obligations. Most of the time, when money is needed, stocks and bonds are the first investments to be sold. This is one of the most expensive IPO mistakes.
One of the most common IPO mistakes is to try to make big apps.
SEBI has changed how IPO shares are given out. Now, all retail applications that are less than INR200,000 are treated the same, no matter how big they are. As long as the retail portion is oversubscribed, the chances of getting allotment are the same at both ends of the spectrum. By putting in big applications, investors block a bigger amount, but their chances of getting the money stay the same. In fact, this is one of the biggest mistakes investors keep making with IPOs.
As you can see, it’s not hard to avoid these IPO mistakes. Through our analysis of IPOs to come, we give this kind of advice to our readers quite often. Still, if you find something that should be on this list, please let us know by leaving a comment below.