Sarah Coles: IPOs are all the rage at the moment, but tread carefully

It’s like the late 1980s all over again, and not just because a particularly cruel fashionista is trying to bring back the mullet. Investing is back in vogue too.
Not every IPO is a success. You only have to look at Deliveroo to see that. Picture: Mikael Buck / DeliverooNot every IPO is a success. You only have to look at Deliveroo to see that. Picture: Mikael Buck / Deliveroo
Not every IPO is a success. You only have to look at Deliveroo to see that. Picture: Mikael Buck / Deliveroo

In the past week, I’ve had conversations about investing in IPOs with an enthusiastic teenager keen to put money in his Junior ISA to better use, and with an intrigued parent on the football pitch sidelines, who asked me to explain what happened to Darktrace (which launched on the UK market last week and the share price jumped 43 per cent in a day).

The first time I remember investment being this much a part of everyday conversation was back in the late 1980s when British Gas was privatised, and the ‘Tell Sid’ adverts were everywhere.

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Back then, the wave of privatisations more than tripled the number of shareholders in the UK to 11 million, and created a new generation of investors.

People took a break from discussing house prices over dinner to compare portfolios. In the intervening years, the popularity of investing in the stock market has ebbed and flowed, but right now, it’s back with a bang.

It’s impossible to attribute its revival to one specific factor. We know some people have had more time to spare during lockdowns, so used the opportunity to get to grips with their finances – including investment.

We also know some have been able to save more while all the fun bits of the economy were closed, and they haven’t been very keen to keep it in cash where they earn so little in interest.

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We also know market falls at the start of the pandemic created some investment opportunities. And we know IPOs have been very popular.

IPOs (or initial public offerings, when companies first list on a stock exchange) have an awful lot in common with privatisations, because they offer investors the chance to buy shares in companies they previously couldn’t buy into – and get in on the ground floor, to take advantage of demand from other investors after the launch, which hopefully pushes prices up.

In recent months, enthusiasm for investing, including IPOs, has reached real highs, especially among younger investors, who have been drawn to them by an awful lot of hype on social media.

People on Tik Tok are working every bit as hard to spread the word as everyone in those corny 1980s privatisation adverts, and this time it’s not just Sid they’re telling. But while it’s fantastic to hear people talking about investment, the challenge is to build on the new-found enthusiasm for short-term gains from IPOs and turn it into a passion for investing.

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The first step is for people to think about the company rather than just the IPO itself.

Not every IPO is a success. You only have to look at the dog’s dinner delivered by Deliveroo to see that.

Anyone who is considering investing in an IPO should gain an understanding of the business. It’s not enough to be a household name, or a brand you like as a user.

You need demand for the shares at the point of the launch to be high enough to push the price up, which requires the fundamentals of the business to be good and the price to be attractive.

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It’s easy to overlook this with all the hype surrounding an IPO, but much of the information you need will be in the prospectus, so you need to read and digest this. Once the initial gains or losses are made, the next challenge is to turn a short-term gain into a passion for long-term investing.

Research among our investors is that on average, they do much better when they buy and hold strong investments for the long term, rather than jumping from one stock to another.

Finally, we need to get to grips with risk. Single-share investments aren’t for everyone, and for most people they’re far less suitable as core holdings than funds.

Once we’ve understood the potential upsides, we need to control the potential downsides by diversifying.

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The good news is that the vast majority of investors are still in it for the long term, and there’s an appetite among newer investors to find out more about investment more broadly.

However, there are still plenty of people who don’t want to talk about the long term. They’re completely focused on the possibility that they might be able to trade themselves to an overnight fortune.

The trouble with focusing on a get-rich-quick strategy is that it can just as easily turn into a lose-money-quick one.

By far the most reliable approach is to understand your investments, build a portfolio that matches your approach to risk, take your time, and get rich slow.

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Thank you

James Mitchinson

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