Initial Public Offerings (IPOs) are much hyped by the media.
Many believe buying them is a good idea.
The data tells a different story.
IPOs are risky.
Investors should understand the possibility of higher returns involves accepting higher risk.
Most investors buy IPOs in the aftermarket because they don’t have the kind of connections that give them access to the IPO at the offering price.
An extensive study of the performance of IPOs in the aftermarket showed underperformance over short and long term periods studied.
This underperformance is especially pronounced in the first and second years after going public. Beyond two years, the underperformance wasn’t significant.
The bottom line is this: Investors have historically not been compensated for taking the higher risk inherent in buying IPOs in the aftermarket.
Don’t be seduced by the IPO hype.