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IPO'S And How To Trade Them - If At All

Often, the hype created pre IPO can get investors excited and not thinking rationally, but what does the evidence suggest about IPO's performance? Should be buy shares pre market?

BY CIFER | Updated 13th May 2021


Initial Public Offerings (IPO) is when companies take to capital markets issuing shares in order to raise funds for future growth, offering the public to acquire a stake in the company in exchange for stock plus potential dividends. 

Difficulties with IPO Valuations:

  1. No historic information to utilise as the company in question has no previous operating history.

  2. Sector dependant - some sectors have little or no competitors for comparison

  3. Negative cash flows to start so Discount Cash Flows (DCF) don't work 

Therefore the valuation for shares initially listed in the market is difficult to quantify but still important. If the market decides shares are priced too high and they tumble post IPO, this can raise serious problems for the company with future raises, but also opens the door to law suits from investors.


The empirical findings in the literature regarding trading IPO's is relatively mixed depending on sample characteristics.


Levi (1980)

  1. Conducted an extensive study of 712 IPO's over a an 8year period (1980 -1988) 

  2. Used a wealth relative formula as Beta is unavailable for unlisted companies

  3. Found first day returns to be statistically significant, + 14.3% on average 

  4. However, shows significant underperformance in long run compared with market index

  5. The companies with largest first day returns has the worst 3yr returns - slow unwinding 

Interesting findings from this paper where long run outperformance is reliant upon certain industries and indexes. Health and household goods companies still performed well in the long run, likely a bi product of consumer utility providing stability in certain necessary goods.

Furthermore, wealth relative of main markets was far greater than that of undeveloped markets, likely due to greater analyst coverage, stricter regulations and better information, attracting more liqduity. Developed markets generally have slacker corporate governance codes coupled with political and economic instability, making IPO' less attractive in these areas.

This study is consistent with other studies about IPO's highlighting the greatest returns are to be had on day one as numerous other factors play a role in the long run performance.


Whats noticeable when observing IPO performance is that every year there are certain companies that give anywhere between 500/1000% within the first year or two. With that being said, as we mentioned above there is very little information available therefore it is difficult, if not impossible to spot these opportunities. But rather, it would be necessary to buy shares pre market in every IPO, however many companies also perform poorly is subseuqent years.

Alternatively, an investor could buy shares pre market and cover the longer term downside with put options (when available; only if requirements are met). This way the upside exposure is made available with little downside risk but unfortunately subscribing to pre market IPO's will come before the release of the options, also, companies are not guaranteed to have options listed on an exchange.

Therefore with this in mind, we have found the most profitable method of trading IPO's is to subscribe to shares pre market. Often the shares offered pre market are much different by the time they trading on the exchange, the price has surged before investors have had a chance to get in. 

Different IPO's use different companies for their initial offering, the first example below of CBX was offered to retail investors through the "PrimaryBid" platform. 


Read the prospectus to find out which are companies are offering pre-market shares


Cellular Goods (CBX)

A frothy IPO which gained a lot of media coverage, likely due to the booming CBD industry in the United States and having a well known celebrity behind it. The pre market price was just £5 per share, however by the time the shares were trading in the market and available for investors, the price was already trading at £21 per share and quickly pushed on towards £30 in the the first hour. 

However, this supports the literature very well where day one returns offer greatest returns as the stock is now trading at only £7. Investors piled in and are now likely stuck in a position hoping the company will find momentum once again, but when? 

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Another IPO which gained a lot of coverage due the popularity worldwide of the company. Similarly, the shares pre market were offered at $68 however opened in the exchange at $143. Interestingly the day one returns were not significant for investors who bought in upon the open however short term returns outperformed.

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  • The evidence is not overly supportive for long term IPO performance (always exceptions)

  • The most profitable strategy is purchasing pre market shares as they often open much higher

  • Popular companies attract media attention which helps boost short term gains

  • Some companies are run aways - the shares keep climbing but with no historic information and/or poor analyst coverage its very difficult to determine which ones

  • Developed markets outperform due economic stability - they attract more liquidity 

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