Money 101  >  Money Myths

"Participating in an IPO is a sure way to get money."

POSTED ON October 31, 2019

The myth

In an IPO, people and institutions can become part-owners of a company by buying the stocks, or shares. Each stock represents a piece of the total ownership of the company that is holding the IPO. (See: What is an IPO or inital public offering).

If the company does well, its value rises and so will the price per stock. Some companies will provide dividends in case they have a surplus of their earnings.

In some cases, the IPO may be for a well-known company that has been in the public eye for quite some time but operating as a private corporation. This can cause much anticipation among would-be owners, who expect the value of the stock to shoot up after they buy.

While this is a potential result, there is also a chance that the company’s stock will end up selling for lower than its price during the IPO. That means everyone who bought at the start will have lost money.

Why do people believe it?

There are many companies (especially in the tech and related industries) now whose stock value has increased a lot compared to their IPO price. For example, shares of Amazon in the US closed at US$30 on the first trading day in 1997. In late September 2019, these go for US$1,740 each.

However, there are many other companies that have not found this level of success. And there are some whose stock prices has gone way down compared to when they were first offered in the stock market.

Risks of believing this myth

You may encounter a permanent drop in stock value after participating in an IPO. While some stocks can recover from dips in their value, others never make their way back up again. Hold on too long and you may lose the lion’s share of your investment.

If you come in sure that you will make money, you may not be able to handle the potential losses.

Verdict: False

There are no guaranteed ways of making a profit in investing. Stocks are also among the most aggressive types of financial instruments, so their risk potential is high.