Retail investors should beware of Arm Holdings’ IPO
Retail investors who are looking to get in on Arm Holdings’ highly anticipated IPO should beware: individual investors often get burned when they jump on hot listings.
Arm, a British chip designer, is seeking to raise around $5 billion in New York in what might be the biggest IPO of 2023. However, its IPO marketing efforts are focused on institutional investors, meaning that most Main Street investors will have to buy Arm shares at potentially higher prices once they begin trading.
Recent history suggests that this could be a risky proposition. The 10 biggest U.S. IPOs of the past four years are down an average of 47% from the closing price on their first day of trading. Investors who bought at the top of an intra-day price surge that often occurs in high-profile listings would have fared even worse, with an average loss of 53%.
Only two of the stocks in those top 10 are up from their IPO prices: software seller Snowflake and Airbnb, which leads with a 111% return.
While dabbling in individual stocks is a notoriously risky business for amateur investors, the analysis underscores just how perilous it can be to buy into blockbuster IPOs on Day One.
Even institutional investors invited to buy into those 10 IPOs before trading would be down an average of 18%.
The S&P 500 has gained an average of 13% since each of those IPOs, nine of which happened in 2020 and 2021.
“If you’re buying in the market, on average, you’re buying at a premium to the offer price,” said Jay Ritter, a professor at the University of Florida who studies IPOs. “For almost all retail investors, buying and holding a low-cost index fund is the best strategy.”
Arm’s debut is expected to rejuvenate a lackluster IPO market which has slowed over the past two years due to volatility and economic uncertainty. However, investors should be aware of the risks before jumping in.
Here are some tips for retail investors considering buying into Arm’s IPO:
- Do your research. Make sure you understand the company’s business model, financials, and prospects before you invest.
- Don’t buy on hype. Don’t let the excitement of a hot IPO cloud your judgment.
- Be patient. IPOs can be volatile, so be prepared to hold your shares for the long term.
- Diversify your portfolio. Don’t put all your eggs in one basket.
If you’re not comfortable investing in individual stocks, you may want to consider investing in a low-cost index fund, which tracks a basket of stocks. This is a more diversified way to invest and can help you reduce your risk.
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