Invest
The pros and cons of investing in IPOs
New legislation permitting equity crowdfunding for small companies and innovative technology platforms is making it easier for everyday investors to access IPOs, but what are the risks and benefits of buying into a new business?
The pros and cons of investing in IPOs
New legislation permitting equity crowdfunding for small companies and innovative technology platforms is making it easier for everyday investors to access IPOs, but what are the risks and benefits of buying into a new business?
IPOs (or ‘initial public offerings’) refer to the first time shares in a company are offered to the wider public, explained Marcus Ohm.
Mr Ohm, an audit and assurance partner with accounting firm HLB Mann Judd, said these offerings were a way for a company to get funding to help it grow by allowing members of the public to purchase a stake in the business through an exchange.
Typically, the investors who buy into an IPO are institutional investors representing large firms or funds, though some SMSF trustees can also use them as “an adjunct to what the main focus of your investment is”, he said.
While it’s traditionally been difficult for retail investors to get involved in the IPO market, new avenues for ordinary retail investors are becoming increasingly available.
“The challenge in the past for retail investors has just been trying to access IPOs in the first place, there’s been some very good gains there but obviously the for individual SMSF investor it’s been very difficult to access them, but there have been a few developments recently,” he said.
One of these developments is the recent legalisation of equity crowdfunding (where businesses can issue equity with lower disclosure costs than traditional public equity offers in a bid to raise funds) for companies which meet certain criteria.
“Now the thing with the equity crowdsourced funding legislation is that it actually limits companies to, I think, $5 million dollars and it limits the individual investor to $10,000,” Mr Ohm said.
“That’s probably not too much of an issue because if you’re looking at your capital allocation you’re probably not really wanting to put more than $10,000 into an individual IPO.
“It’s probably a factor that’s helped increase retail access to the market, and that’s a positive for retail investors.”
So what are the potential benefits for investors willing to back a new business as it joins the exchange for the first time?
According to Mr Ohm, IPO share prices often enjoy strong growth, particularly on their first day on the exchange.
“The all ordinaries are pretty much at the moment where we were around the start of the year, I think it’s around 5,750, so it’s been pretty much no growth in the main market,” he explained.
“If we look at the IPOs that have happened so far in 2017, the average gain or loss over listing price was around 6 per cent, and if you look at something which we call the ‘first day premium’, which is how much the shares go up by on the first day of listing, that’s actually around 8.8 per cent.”
However, investing in an IPO shouldn’t be thought of as a surefire way to grow your money and investors would be wise not to put too much money into the market at once.
“We’ve had some shares that have gone up 190 per cent on what they listed at, but we’ve also got some shares that have lost money as well,” he said.
“It’s really important that you don’t allocate too much capital to these because you can get some good gains on them, but there’s also a bit of risk there and if you’re in the pre-retiree phase you obviously don’t want to be allocating too much capital to those companies that may have a slightly higher risk.”
Mr Ohm said IPOs present great opportunities for many investors, but they need to be used as part of a “sensible strategy” and given these are typically new companies, investors need to make sure they fully understand what the business does, its growth prospects, and the risks associated with it.
Property
Millennials believe first home buyers need more support
Australia’s up-and-comers in the housing market say more needs to be done to slow rising house prices. ...Read more
Property
3 in 4 borrowers in trouble are in lockdown: ANZ
Despite offering support, ANZ said freezing home loan repayments will be the last resort, as three in four requests for support stem from NSW. ...Read more
Property
RBA gives APRA’s use of macro tools a tick of approval
Ahead of an expected move to impose tougher lending rules on the banks, the Reserve Bank has looked into previous attempts by APRA to cool the housing market. ...Read more
Property
Federal incentives are driving more first home buyers into the market
While property prices continue to grow, new research suggests that the government’s current crop of first home buyer incentives is having an impact on this segment of the market. ...Read more
Property
Why it now costs 130% more to service a mortgage than 3 decades ago
The lifetime cost of owning a home has increased by over 130 per cent in just three decades, new research has revealed. ...Read more
Property
Using the 30/30/3 rule for home buying during uncertain times
Thinking of buying a home? Uncertain economic times may have you double guessing your purchase, but the 30/30/3 rule can help you make this a reality. ...Read more
Property
Rental yields reach decade high, but not all markets move at the same pace
Changing consumer preferences towards lifestyle destinations and a lack of supply have led to record national price growth, albeit price fluctuations vary region-to-region, fresh figures show. ...Read more
Property
What younger Australians are getting wrong about home loans
As young Australians look to fight the odds and take their first step onto the property ladder, more and more are making easy mistakes. ...Read more
The Olympic effect on property and equity investors; COVID-19 Disaster Payments and super
Listen now
Do lockdowns boost property prices? Are short-sellers levelling the playing field? Did you lodge your tax returns early?
Listen now
Will lockdowns halt the housing boom? Is the metaverse taking over? And the cons of lodging your tax returns early
Listen now
Are you being priced out of the market? Have you got the Tuesday blues? And are you ready for the upcoming super changes?
Listen now
Property
Millennials believe first home buyers need more support
Australia’s up-and-comers in the housing market say more needs to be done to slow rising house prices. ...Read more
Property
3 in 4 borrowers in trouble are in lockdown: ANZ
Despite offering support, ANZ said freezing home loan repayments will be the last resort, as three in four requests for support stem from NSW. ...Read more
Property
RBA gives APRA’s use of macro tools a tick of approval
Ahead of an expected move to impose tougher lending rules on the banks, the Reserve Bank has looked into previous attempts by APRA to cool the housing market. ...Read more
Property
Federal incentives are driving more first home buyers into the market
While property prices continue to grow, new research suggests that the government’s current crop of first home buyer incentives is having an impact on this segment of the market. ...Read more
Property
Why it now costs 130% more to service a mortgage than 3 decades ago
The lifetime cost of owning a home has increased by over 130 per cent in just three decades, new research has revealed. ...Read more
Property
Using the 30/30/3 rule for home buying during uncertain times
Thinking of buying a home? Uncertain economic times may have you double guessing your purchase, but the 30/30/3 rule can help you make this a reality. ...Read more
Property
Rental yields reach decade high, but not all markets move at the same pace
Changing consumer preferences towards lifestyle destinations and a lack of supply have led to record national price growth, albeit price fluctuations vary region-to-region, fresh figures show. ...Read more
Property
What younger Australians are getting wrong about home loans
As young Australians look to fight the odds and take their first step onto the property ladder, more and more are making easy mistakes. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
