Kenyantykoon's Blog
-
why IPOs ar a bad investment idea
Posted: April 29, 2010, 6:05 pm by kt
This is a short post to get you thinking about whether or not you should invest in that IPO.
I know that initial public offerings cause a lot of excitement in the investing group but I have reason to believe that they are not the best of investing ideas.
First off, an initial public offering is where a company is broken up into stocks and then sold to the public in the stock exchange for the first time.
Here is the somewhat similar IPO definition from investopedia.
While people think that this is the best of times to pick up the stock, I think that it is one of the worst for a number of reasons.
First off in value investing you have to look at the history of the company- as in how it has been performing, the dividend record, the earnings ratios and a whole lot of other information that will consist of due diligence where the investor is looking for a margin of safety to safeguard his invested capital. A company that has just floated its shares for the first time does not have all this information that will help the investor invest in it or not. Because of this, I think it is just best to keep away from them.
Another reason why I think that IPOs are a bad investment idea is the fact that maybe the company doesn’t really need the money(this is one of the main reasons that a company goes public-to get more money for expansion). The management, or the owners may just be taking advantage of the fact that there is a raging bull market, where stock prices are going up thus making them sudden millionaires. I happen to think that if you invest in a company going public for this motive, then there is a possibility that you as the shareholder may end up in a puddle in future because they won’t really care for you but only for themselves. This will probably be followed by huge salaries, a lot of benefits and you will experience dividend cuts with no apparent reason.
Still another reason to stay the H-E-double hockeysticks away from initial public offerings is because of the big dogs. These big dogs include the big banks, insurance companies, big investment funds and large corporations that always get the stocks at a price lower than the prices that the individual investors; before the stock starts public trading. This will means that you will get the stock after the price has gone very high up over the book value. This will mean that you are giving up you margin of safety to get a stock that is probably not even worth the hustle.
Want proof? Go through this linked article on failed IPOs and see what I mean :]
On the other hand staying away from an IPO could mean that you miss the opportunity of a lifetime, am talking something like Google, or Microsoft or something that has made millionaires and billionaires. But I guess this is the main reason why people invest in IPOs despite the risk, but I still think that is is a huge gamble to invest in them.
Random Posts
Blah blah blah
Fish cakes
Alas a fish cake.
Yet more fish cakes
Guess what ... yeah ... fish cakes.
The end of the fish cakes
