Source: Finance Association

British chip design company Arm will begin an official listing transaction this Thursday. Right now, many individual investors in the US are also hoping to get a share of the pie in this highly anticipated public offering, but they need to be careful: when individual investors want to “drink soup,” they often get “burnt in their mouths” when they want to “drink soup” by snapping up popular listed stocks.

Arm's goal is to raise about $5 billion in the New York market, which is bound to be the largest IPO so far in 2023. However, going back in recent years, the returns of other large listed companies have been mostly disappointing.

According to people familiar with the matter, since Arm, which is owned by Japan's SoftBank Group, is not particularly famous among ordinary consumers, the company is focusing its public offering on institutional investors.

As a result, most ordinary investors can only buy Arm shares at a price that is likely to become higher after it is officially listed and traded. However, a statistical analysis in the industry shows that since individual investors hold individual stocks for less than a year on average, recent history indicates that they may experience losses.

According to this data analysis as of last Friday, the 10 largest US IPO companies in the past four years have dropped 47% on average from the closing price on the first day of listing. And if investors buy at the top of these companies' high-profile listings, the situation will get worse, with an average loss of 53%.

Although for amateur individual investors, getting involved in individual stocks itself is a notoriously high-risk experiment, the above analysis still highlights how dangerous it may be to buy a blockbuster IPO on the first day of listing. In fact, even institutional investors invited to subscribe for these 10 IPOs before trading will face an average drop of 18%.

Among the top 10 IPO stocks, only two stocks recorded an increase compared to the issue price at the time of the IPO, namely software vendors Snowflake and Airbnb (Airbnb). The latter had a return of up to 111%.

By contrast, the S&P 500 index has generally risen 13% on average since the last major IPO.

Jay Ritter, a professor who studies IPOs at the University of Florida, said, “If you buy in the market, on average, you enter at a price higher than the issue price. For almost all individual investors, buying and holding a low-cost index fund is the best strategy.”

However, it is foreseeable that although Arm is a B2B company and consumer brand awareness is not high, the promotion of its IPO may still attract the interest of individual investors. Because since this year, chip maker Nvidia, which is at the center of the artificial intelligence boom, has been a favorite of individual investors.

Marco Iachini, senior vice president of Vanda Research, which tracks retail transactions, said, “Regardless of the Arm IPO results, you'll see some niche investors in the retail community trying to get involved, although it won't reach the level of fanaticism we saw in 2021.”

According to the latest news on Monday, as the highlight of the early fall US stock IPO, ARM's IPO has now been oversubscribed by 10 times. Sources say the underwriting bank may end the subscription a day early on Tuesday afternoon, but the IPO pricing will still be announced on Wednesday, and the official deal will begin on Thursday.

Editor/Somer