Initial public offerings are exciting–just take a look at Facebook. It turns early investors, company founders and longtime employees into instant millionaires. Even banking underwriters and other inside investors stand to gain a substantial bundle of cash, especially since they get to purchase shares at an IPO’s offer price.
But for everyone else who wants in on a company’s new public stock, they have to buy shares at open prices which are often significantly higher than offer prices. Does this make IPOs smart investments if you’re not a part of the inside process? This visualization takes 10 IPOs from this year with the highest opening-day jump, and compares their growth from their offer price against growth from their open price to see just how wide the difference is between the two.
With one exception, purchasing any of these company’s stocks at their open prices and selling today means losing money. On average, a company’s stock growth from its open price represents nearly a 40 percentage point drop from its offer price growth. Even investors who did jump in have much less time and opportunity to sell and make a profit. Take LinkedIn’s stock price for example, which skyrocketed when it opened, but has often fallen since then. Other companies, such as Zillow, are even worse.
This isn’t to say that the stock market isn’t a viable investment option. Many expensive investments that are long-term continue to grow, just look at many tech companies of the past decade. But if investors are specifically looking at the public offering process to make a few fast trades and a quick profit, it may not always be worth the risk.