IPO: A Great Opportunity to Become (or Not To Become) Rich Fast

A three-letter combination “IPO” causes both professional and non-professional investors to fall into a state that probably resembles what the followers of various theories and hypotheses trying to explain the origins of difficult-to-explain phenomena feel when they see another three-letter combination: “UFO” ("unidentified flying object"). Namely, emotional excitement, exaltation, and the joy of waiting for a miracle.

IPO stands for "initial public offering". In this case, this implies an offering of shares. Why does this event evoke such exuberant emotions? This is primarily due to the fact that investors are presented with the opportunity to earn a lot of money in a very short period of time.

In what way? The fact is that within a couple of days or weeks the price of newly listed shares may experience not only a 10% daily rise, which is certainly a lot for the already listed shares, but substantially, significantly, much more… How much more? Airbnb, a popular and “fashionable” US housing rental company, expected to place its shares at a price between $44 and $50 per share during an IPO in December 2020. A couple of days later the company raised its expectations for the initial share price to trade between $56 and $60. A couple of days later the shares were sold to investors at $68 per share. On the first trading day the share price exceeded $144 per share. Two months later in February it reached $216. Since then, the share price has experienced its ups and downs now trading around $170 USD per share (see Picture 1 below).

But the life of the IPO market, like any life, consists not only of successes, but also of failures. Deliveroo, a similarly popular and "fashionable" UK online food delivery company, sold its shares at ￡3.90 apiece during an IPO on the London Stock Exchange in March 2021 (see Picture 2 below). A day later the share price fell to ￡2.87. A month later it reached its minimum value of ￡2.28 per share. Then, a usual period of ups and downs followed with the share now trading at a price of about ￡3.31.

Still, the temptation is so great and the prospects are so enticing that the whole "IPO army" is involved in this process: investment bankers, analysts, sales, marketing and IT people, lawyers, accountants, stock exchanges, financial regulators, journalists, etc. As you can understand this is not a low-budget event. This even contributed to the creation of a separate industry: "special purpose acquisition companies" or simply SPACs (see Picture 3 below). SPACs do not have any existing business, and, accordingly, any activity. They do not have any business plan either. There are no assets. But they place their shares on stock exchanges and raise capital. What is their purpose? The purpose is to search for and acquire or merge with some promising company. This process usually takes two years. If there are any unspent funds left, these are returned to investors. Why might this be interesting for promising companies? Their interest stems from the fact that there is an opportunity to bypass the usually exhausting and expensive IPO process by listing their shares on a stock exchange in such an indirect way.

Why do share prices experience such dramatic ups and downs after IPOs? Should we blame speculators? They undoubtedly play some role. Still, objectively speaking, shares listed during IPOs are very often placed by companies that work in new, innovative industries whose prospects are inherently difficult to assess. That is why if the outcome of an IPO is successful, the owners of the company listing its shares on a major stock exchange can become billionaires, large investors can become multimillionaires, while smaller investors can get “simply” rich. Well, or not to get rich… But this does not deter neither professional, nor non-professional investors from taking risks. Why? Because, as Mark Twain once said: "Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did do. So, throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover”. Ask the UFO enthusiasts. Their chances of success are much smaller, but they keep on believing…

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