With all the recent clamoring over new IPOs in 2023 like Instacart and Arm Holdings, it is paramount that we remember that for every IPO like Microsoft or Apple that turns out to be a winner, there are thousands of losers. Historically IPOs have been terrible investments with the winners of IPOs being the investment banks and insiders that are able to purchase shares at their initial offering price well before the security is sold to the public at higher prices.
The many adages on Wall Street which suggest IPOs should probably stand for “It’s Probably Overpriced”, or “Imaginary Profits Only”, or “Insiders Private Opportunity” reflect on how issuers of IPOs seek bull markets characterized by euphoria and frothy market valuations, so they can readily sell poorer and poorer issues to the public at exorbitant prices
After all most issuers and controlling interests seek these frothy euphoric markets to cash in because investors have at this stage in the bull market become complacent to risk and more likely to purchase securities of inferior grade at inflated valuations.
Just as the speculator seeks the highest possible price to sell, issuers of IPOs seek the most irrational euphoric markets to issue common stock to the public when the price is much higher than the insider values.
But investors must use practical judgement, to resist the deceptive salesmanship from these new common stock offerings, and have a clearer understanding that IPOs typically benefit only the issuer, to the detriment of the investor.