The stock market in whole, should never be seen as some sort of circus show, in which stocks are hawked to unsuspecting patrons as if these stocks all pretty much represent the next great thing, when that often is not really so. An Initial Public Offering (IPO) takes place when a company that previously has been privately held, makes it shares available for the general public to purchase at some preselected price point, with a predetermined amount of shares so being offered to the public . While one might think that there are all sorts of sophisticated formulas that are utilized to select an appropriate IPO price point; rather, it must be said that the pricing of any IPO really is more of an art, as compared to being a distinct science.
The fact of the matter is when an IPO comes to the market, that those on the inside that are the holders of those shares, whether they be employees, executives, venture capitalists, or other institutions, are basically selling their shares for money to the general public. So then, one question that would logically come to the mind, for anybody that is considering the purchasing of such, is that when the insiders of the company, of which quite obviously these people really know what is actually going on inside that company, are willing to cash out their shares, or at least a portion of them, then perhaps they might be getting the better part of the deal.
In point of fact, according to data compiled by Bloomberg, and as reported by the latimes.com, IPOs are trading 70% above their average IPO price over the past t0 years, whereas the S&P 500 has risen 190% over that same time period. This thus signifies that IPOs on average have underperformed by a considerable margin, stocks that are already listed on the S&P 500. The first reason why this is so, is that the IPO price of far too many of those so issued, is set higher than the intrinsic worth of that particular stock, and when "investors" pay a premium for a stock, they are going to have an awful of ground to make up. The second reason why IPOs underperform is that those stocks that been trading for a number of years, and have therefore a track record of sales, profits, and other pertinent information, available for investors to take a good look at, makes for a more informed decision in the purchase of that stock.
The most important thing to understand for investors, is that the party that benefits the most from an IPO is almost never the buyer of the IPO when it is released to the public, but the individual or institution that is trading their heretofore private stock for money, because they are clearly in the position to know whether or not, such a trade is to their benefit, or they would not typically make that trade, but would simply hold onto to what they already have, or buy even more.
So then, it doesn't seem to make a whole lot of sense to buy what the insiders are selling, especially when many of those companies going public, have failed to prove their value or to provide a sound forecast for the future; and in recognition that there are plenty of other opportunities that are not only a better play, but a more prudent one.