The risks in share market listings

A new wave of share market listings is forming. But watch out for the potential rips.

There have been 17 new company floats on the Australian Securities Exchange (ASX) since the start of 2023, and nine have been trading below their initial listing price.

It’s a sobering statistic, especially when considering the Australian share market as a whole has recorded strong positive gains so far this year.

But it’s not a totally unexpected statistic either. In fact, it’s quite easy to look back at the performance of new share market listings in past years and also see that a relatively high percentage of floats have effectively sunk following their listing. That is, soon after they have listed, their shares fell below the price at which they were initially issued to investors.

Many companies that have listed through an initial public offer (IPO) to investors end up trading below their issue price right from their first day as a public company. Their investors have lost money from the very start.

An IPO revival

The last 18 months or so has been slow from an IPO listings perspective, with heightened share market volatility and weak economic conditions acting as a disincentive for many companies to go through with a share market listing. IPO numbers have been well down on previous years.

However, the tide may be turning in that regard. There are currently 10 Australian companies in the ASX’s list of upcoming floats.

The United States share markets are also a good indicator of increased listings activity, with several high-profile private companies attracting interest from IPO investors.

Some share market commentators believe IPO investors have now moved from a fear of losing money state to a FOMO state (fear of missing out).

Taking a long-term approach

IPO investment activity is typically fuelled by speculators seeking short-term gains. Indeed, a large percentage of IPO investors look to make a gain within the first few trading days and then sell out.

Out of the 17 ASX listings so far this year, eight recorded gains on their first trading day and a further two closed unchanged from their issue price. After five days of trading, only seven were still trading above their issue price. The majority of IPOs don’t deliver instant share market gains.

That generally comes down to a number of factors. Many IPO companies are quite small, have a limited track record, and have gone down the listing pathway to raise money from investors so they can continue to fund their expansion.

As such, they may have minimal revenue and be a long way off from recording a profit, let alone paying a dividend to their shareholders – if ever.

It’s important to keep in mind though that every listed company in the world – including the very largest companies – has at some stage listed on a share market through an IPO process.

Participating in an IPO could certainly form part of a broad, long-term investment strategy.

But always keep in mind that IPOs do tend to carry a relatively high degree of risk and can be prone to speculative share market trading.

Just as you should do with any other investment, it’s crucial to undertake extensive due diligence before committing your money to an IPO. That includes reading the company’s prospectus thoroughly and conducting other market research.

In short, it’s best to look before you leap into an IPO.

Contact us today if you have any questions.

Source: Vanguard August 2023

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

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