Investing in IPOs: a good idea or a risky affair?

IPOs are far more likely to underperform the market than deliver spectacular gains. Here's why investors shouldn't get excited

IPO Initial Public Offering text
(Image credit: Getty Images)

Private investors seem increasingly wary of initial public offerings (IPOs). Obviously, the number of new listings in London has been low for quite some time and it’s hard to know whether this lack of enthusiasm is simply down to the absence of anything interesting coming to market (most companies with a strong story have preferred to list in the US). However, whatever the reason, the record suggests that it’s no bad thing if they are cautious. Studies across multiple countries consistently show that IPOs underperform on average, and frequently underperform quite miserably. The most comprehensive data on this is, as usual, in the US. That’s largely due to the work of Jay Ritter of the University of Florida, who has compiled statistics on IPOs stretching back to 1975, and the conclusions we can draw from his numbers are pretty stark and discouraging.

IPOs: a recipe for underperformance

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up
Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.