Greed, temptation, herd actions, FOMO, overconfidence, going overboard on taking risk, impatience, are all the common behavioral traits one can witness in investors amidst a bull run. Topping up the excitement is the IPO frenzy. When the going is good, companies capitalise on the opportunity to flock the markets & raise capital at desired high values. Many IPOs are expensively priced and retail investors are at the losing end. I had compiled data of about 243 IPOs which flooded the market between 2021 till date. Nearly 23 per cent of them are trading lower than their offer price.
Further, I recently came across a SEBI report on IPOs, which shows interesting findings. The study covered data from 144 IPOs listed between April 2021 and December 2023. As per the study:
- Individual investors sold 50 per cent of the shares allotted to them by value within a week of listing, and 70 per cent of shares by value within a year.
- This selling behaviour was influenced by returns. When IPO returns exceeded 20 per cent, individual investors sold 67 per cent of the shares by value within a week. In contrast, only 23 per cent of shares by value were sold when returns were negative.
This is known as the disposition effect where investors tend to sell IPO shares that posted positive listing gains, compared to those that listed at a loss. It clearly shows retail investors are fixated on short term returns. The quick gains mindset prevents them from inculcating patience to stay invested in good companies for long term wealth creation.
- Notably, the study revealed nearly half of the demat accounts that applied for IPOs between April 2021 and December 2023 were opened during the post-COVID period (i.e., 2021-2023).
This implies post covid entrants have not seen sharp market declines and entire portfolios in deep red yet. Hence, they do not understand what risk means and how to manage it.
Practically speaking, most retail investors would not even bother to dig in the IPO prospectus and understand the business and numbers. Many of them would not be savvy enough to do so. Still, they need to understand, making money in IPOs is more or less akin to a lottery and they may get lucky or unlucky. Hype and excitement do not necessarily tantamount to a good investment opportunity always.
Rather than betting money blindly like throwing darts in the dark, it would be prudent to wait for the company to get listed and track its news and developments for some time to understand if its worth investing in the same.
If an investor still wants to satiate the quick-money itch and blindly wants to jump onto the IPO bandwagon, he should be prepared to lose money and needs to take calculated risks by not going overboard. Investing is not about returns first, it is about managing the risks well.