Why You Should Not Invest in IPO?

People who invest their hard earned money in stock market often show interest towards something new that enters the market. You might have heard that it is very important to have proper control over your emotions. But sometime people don’t have control over their emotions. Due to which they end up losing their minds in the bull market. This is especially done when a IPO (Initial Public Offering) is launched in the market. But there are few reasons Why You Should Not Invest in IPO.

However, there have been cases IPO’s that have offered great value for money and investment. Some of the example of such IPO’s are Infosys, Dixon Technology, etc. But it is not necessary that every is as good as the above mentioned cases. While there is no doubt a good IPO can make you earn hefty profits, but it is also a harsh truth that a wrong IPO can break you financially.

Reasons Why You Should Not Invest in IPO

You might have heard this quote that ‘one should raise fund only when money is available in abundance, not when you actually need money’. Companies always use this quote and you can even notice that companies actually launch their IPO when money is available in abundance in market.

While investing in an IPO it is very important to read the offer document. As we know that when a company comes with its IPO it presents its 500 pages documents. This document contains complete details about the IPO. But honestly speaking, who has this much amount of time to read this 500 pages document? Hardly few people read these documents offered by the company. One of the famous quote for investing in stock market is, “Please read the offer document carefully before investing.”

Here are 5 reasons why you should not invest in IPO have been explained below:

1. IPOs Create Vivid Biasness:

It is very important for you to understand the fact that all the investment bankers and underwriters of IPO are also the salesman of a company. So the information provided by the investment bankers and underwriters are completely biased.

When an IPO is issued, an intentional hype is created so that the IPO comes in notice of the investors. As IPO which stands for Initial Public Offering is the one that is offered only once by each company. Hence an unnecessary hype and baseless opportunity is created for the investors.

Well promoters, investment bankers and underwriters are the one who create baseless and vivid stories. With the use of attractive terms like “listing gains”, “long term investment”, “bright future”. All this is done to get attention of investors and hide the picture using those all this beautiful scripted scene. On the basis of these things they are able to get attention of innocent investors. Hence now you know why you should not buy IPO?

2. IPO’s are Comparatively Expensive:

People believe that IPO’s offer you an opportunity to buy it an lower price. But the reality is that when an IPO is launched in the market then it is market that will take the graph either upwards or downward. Now there might be a case by the time you have invested in that particular IPO its price might have gone way upward.

However, in other case that a company might launch its IPO at a lower price but when actually its IPO is traded in the market the price would be higher than its actual launch price. Hence now you know why you should not buy IPO?

3. IPOs are Highly Volatile:

Well IPO’s launched in the market are highly volatile this can be said because when a IPO of a particular company is launched then it is the market that will judge the IPO on the basis of its worth. So there might be a case where people believe in the IPO then automatically its price will increase. But in opposite case the price of IPO will automatically come down badly.

Also there might be a scenario where initially the price of an IPO had gone up by 50% but by the end of the day it might come down to 75% which means lower then the offer price. So even the risk factor associated with the IPOs is very high due to high volatility of the IPO. That is why you should not buy IPO.

4. IPOs Tend To UnderPerform:

Several people who invest in IPO often invest for short time period or for short term gains. Furthermore, people invest only for a period of few weeks and months. This is the case which often happens in the bull market.

But if investors are looking for the long term returns from IPOs and it is a doubtful. As most the IPOs in long term underperform. All this simply just happen because after a certain time people start valuation of the stock. Due to which the price of the stocks get down and start giving negative returns to its investors.

5. IPOs do not apply Circuit Breaker

When you buy a particular stock which is trading in market then in that case concept of circuit breaker exists there. But when it comes to IPO’s there is no concept of circuit breaker exists here. The term circuit breaker means that the trading of particular stock is halt for a particular period of time. This can be done in either of the cases like even if the price falls below a particular level or when price of particular stock rises above a particular level.

Since when the concept of circuit breaker does not exist here what if the price of the IPO drops down by badly. Then automatically you will incur heavy losses even you may achieve negative returns from your investments. Hence it is advised to not to why you should not invest in IPO.