How to deal with IPO Frenzy?

“The safest time to buy an IPO is on the breakout from its first correction and base-building area. Once the new issue has been trading in the market for one, two, or three months or more, you have a valuable price and volume data that you can use to better judge the situation.” – William J. O’Neil, MarketSmith Founder

 With the recently concluded IPOs of Hudco, CDSL, and AU Small Finance Bank making the news, we ask if a retail individual invests heavily in IPOs? A common notion in the market is that IPOs are easy money with minimal risk. We would rather ask our readers to be cautious with IPOs for the following reasons:

● Nearly all of the good issues end up with a tiny allotment for the retail investor due to huge institutional demand for the stock.

● Major institutions can afford to do research that is not commonly available to the layman investors and are able to spread their risk over many IPOs.

● Some issues may be hyped up or heavily oversubscribed, causing the stock to open far above the price set by the underwriter. Many investors, who place market orders to buy shares of IPO’s on the first day of trading,find that their orders are executed at prices far higher than they would have expected.

● New issues do not have an established market price and volume actionable data. We believe, buying stocks without technical analysis by using price and volume data is synonymous to participating in a running race, but  with just one leg. If it’s your lucky day, you could land up winning the race, but the odds are stacked against you.

Hence, we suggest that investors stay out of buying new issues. Investors can buy new IPOs once the stock has traded in the marketplace for at least two to three months or more, and if the stocks have formed proper price bases. Even so, new issues carry greater volatility and occasionally suffer massive corrections during difficult bear markets. This usually happens after a period of wild craze in the new-issue market, where every offering seems to be a hot issue.

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