2021 has been hot for new listings on the stock market. When a company goes public, we refer to it as an initial public offering (IPO). As a retail investor, there are different ways I can take advantage of such issuances. Three recent examples that differ in several ways are Deliveroo, Coinbase and Kanabo. Having invested in some and stayed away from others, here’s what I’ve found out when investing in IPOs.Â
Watch out for volatility
Being careful about volatility is a big lesson I’ve learnt over the years with IPO investing. As it’s the first time investors can get a piece of the action, there’s often a large amount of buying activity on one hand. On the other is a wave of selling. This could be from the founders selling down their shares.
The net result of this is a very choppy period of trading for the first few weeks after the IPO. In the case of Coinbase, the shares rocketed 52% higher on the first day alone. For Kanabo, prices doubled in the initial trading period. Yet after peaking, Kanabo shares are now 50% down from the post-IPO high.
To me, such volatility can be an opportunity, but also a risk. Since I’m not in the business of trying to make a quick buck and sell out, I prefer to wait on the sidelines for the first few weeks before looking to invest in an IPO. If I strongly believe in the company, I’ll go against this advice on occasion.
Gauging sentiment
Another lesson I’ve learnt is that it’s very hard to gauge sentiment about how well an IPO will be received. This is something that’s been seen for decades. Usually, shares are underpriced slightly in order to rise on the first day of trading. This is hoped to show positive sentiment in the company, along with other reasons.
However, this doesn’t always work. Only recently, I bought in to the Deliveroo IPO. Sentiment turned sour just as the IPO went through, after word got out that some large institutions weren’t buying. So even though the initial share price was set at the low end of the range, it still fell significantly to begin life as a PLC.
There isn’t much to be done here, except be happy with the stock I’ve bought. In this case, I do think it’s a good long-term buy, so I’m happy to hold it.
IPO investing notes
There are lots of small details to take note of when investing in an IPO. Firstly, when can I buy? Deliveroo offered retail investors the chance to buy at the initial subscription price. For others, I’d have to wait for a week or more before the share-trading becomes unconditional and I can buy.
Sometimes, IPOs will happen in alternative ways, such as with Kanabo. This actually traded as a reverse merger with an already public company. Another similar type of situation is with a Special Purpose Acquisition Vehicle (SPAC).Â
Ultimately, there is a lot to take into account when thinking about investing in an IPO. But if done correctly, it could be a very profitable endeavour in the long run.