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Investing in IPOs may be more risky than you think
— -- Q: How have the IPOs offered by Fidelity to its brokerage customers done?
A: Getting access to IPOs at the offering price can be a frustrating experience for individual investors. The answer is usually no.
Some brokers have tried to remedy that and make initial public offerings more available to individual investors. But the question remains, is that necessarily a good thing.
Traditionally, shares of hot initial public offerings are only doled out to high-net-worth individuals who are big clients of the investment banks handling the IPO. Large mutual funds and pension plans are also usually able to buy into IPOs at the offering price.
Individual investors usually have to wait until the initial investors sell and then buy, usually at much higher prices, to get a piece of an IPO.
Back in 2009, though, Fidelity started trying to narrow this gap. The online brokerage stuck a deal with KKR and Deutsche Bank to offer shares of select IPOs to its customers at the offering price. Since 2009, Fidelity has offered more than 300 IPOs to its customers. Fidelity has offered IPOs to customers since 1996, but really stepped up the effort in 2009.
But the question remains, is it a good idea for investors to go for IPOs, even at the offering price? Studies have shown that IPOs, typically, only deliver market returns in their first six months as a public company. After the first six months, most IPOs wind up delivering disappointing results.
But that's the aggregate, which includes IPOs investors don't have access to. What about the IPOs offered by Fidelity to its customers? Analyzing the deals shows that Fidelity's offer of IPOs can be lucrative, or disappointing, depending on which deals are selected.
On average, the 207 IPOs Fidelity has offered its clients since 1996 that are still trading are up 45% from their offering prices, according to data from S&P Capital IQ.
But that average distorts some scary facts. If you toss out the extreme losers and winners, and take the median, you find that the median performance of the IPOs is a loss of 9.7%. And that doesn't even include the many IPOs that went to practically $0 as their business plans didn't pan out.
Investing in IPOs is a tricky business. While the deals that jump in value on their first days get the most attention, those are not the norm. IPOs tend to be very volatile since investors aren't quite sure how to correctly price a company with very limited trading history and sometimes limited financial results.
If you're buying an IPO, even if you're lucky enough to get it at the IPO price, understand you're dealing with one of the riskiest investments you can make on the stock market.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
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