The risks of investing in IPO stocks
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Investing in IPOs comes with its own risks, and we strongly recommend that you familiarize yourself with them in this article before jumping into the investment.
Uncertainty of allotment
Up until the IPO date, you don’t really know how many shares per order you will get. This makes it difficult to predict the share of stocks in a portfolio.
If you deal with the most popular (and successful) IPOs, there’s a high probability that you will get low allotment, but if you deal with the riskiest IPOs — on the contrary, you may get a high share allotment.
In May 2019, Beyond Meat went public, the share allotment was ≈30%. The return on investment was 470%. In July that same year, Douyu went public, the share allotment was 68%. By the end of the lock-up period, the company’s shares were worth 40% less than the offering price.
Price risk
A company’s share price may be below expectations on the first day of trading or fall any time after.
The price can be affected by both external factors — a market crash, a new competitor, as well as by internal risks, for example, the product has changed.
Investment period risk
After a company goes public, its stocks usually can’t be sold throughout the entire lock-up period.
And if shares drop in price, then you don’t have an option of closing the investment before the expiration of the lock-up period. Though we do find ways for an early exit if the market offers such instruments.
How we evaluate risks
Before we post an investment idea on United Traders, we analyze every company and indicate the risk level on its description page.
The majority of investments in IPO stocks have a medium or high risk:
Medium risk 10–30%. A company’s shares may drop by 10-30%, and this will fall within the normal range.
High risk >30%. A company’s shares may drop by more than 30%.
To reduce risk, we recommend diversifying your portfolio and investing in several companies.
