The IPO survival guide

There’s been a string of IPO disasters in recent years. Here’s how you can avoid the next one.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

According to Price Waterhouse Cooper’s report IPO Watch Europe, there has been a significant increase in initial public offerings recently. The report states that “Q3 2017 was London’s most active third quarter by volume since 2011,” raising €2.7bn. But not every IPO represents a good deal.

The chance to get in on the ground floor often seems like a great idea to investors who are afraid of missing out, but the exuberance caused by a rising market often leads a number of average companies to list while the going is good. 

These three simple rules should help you side-step any poor performers. 

Rule 1: You gotta have faith

Back in 2012, Facebook’s listing was billed as the investing event of the year. It seemed like every man and his dog was scrambling to own a chunk of their favourite social media site – and many intended to flip their small stakes for quick gains. 

The excitement quickly evaporated as the stock crashed roughly 50% in its first few months. The shares have long since recovered, but at the time there was a palpable sense of panic among shareholders. 

This famous example illustrates the dangers of buying into an IPO for quick profits. That’s gambling, not investing. 

In my view, serious conviction in the business’s long-term prospects is a prerequisite before diving into any IPO. Those that held the faith are up about 360% now, while those who bottled it at the bottom lost half their initial investment. Ouch. 

Rule 2: Beware massive yields

Nothing gets UK investors going like an outsized dividend yield. In my experience, we’re willing to look past all kinds of problems to get our hands on chunky payouts. Don’t allow this proclivity to draw you into poor investments, however. 

Take Entu, which offered a blockbuster 8% yield when it listed. The company sold energy-efficient conservatories, doors, solar panels and other such items, but did not manufacture much themselves.

In short, it was simply a salesman for other companies. There seemed to be no barrier to entry for this sort of cold-calling organisation and profits seemed to be propped up by tax breaks. 

The solar division took a hammering when these tax breaks were stopped. The division swung from a predicted £1.6m profit to a £2m loss rather quickly. The bad news has kept flowing since then. The shares were suspended on 24 August and had fallen to below 30p at the time, despite listing at 100p.

When buying a high-yielding IPO, be honest with yourself. Would you buy that company if the payout wasn’t so tantalisingly high? If not, I’d consider looking elsewhere. 

Rule 3: Buy local

There are plenty of solid foreign companies on the FTSE 100 (think Shell) but in my experience, it is best to avoid foreign IPOs on AIM. The market is designed to facilitate easy access to capital for growth companies and has relaxed regulations as a result. This has led to investors being on the receiving end of wealth destroying and suspicious activities by the likes of Globo plc and CamKids.

If you are considering investing in a foreign company on AIM, ask yourself why this organisation can’t raise capital in its own country. If it doesn’t have a very good reason, perhaps you should avoid it. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zach Coffell owns shares in Royal Dutch Shell. The Motley Fool UK owns shares of and has recommended Facebook. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »