If you talk within any investment firm, initial public offerings (IPO’s) can be a particularly exciting opportunity. It is one of those once in a market-lifetime that seems to land in your lap and, if you’re wise enough and bold enough, can make you a whole lot of money. To be certain, there are brands throughout the market that everyone wishes they could’ve thrown their investment in with as they first entered the picture. Yet IPO’s, particularly in the closed-end mutual fund arena, can be a far more disastrous circumstance than one may believe.
To start, what is the difference between your normal IPO and an IPO of a closed-end mutual fund? An odd combination, they act like your normal company stocks as they are traded on the stock exchange. Like your normal IPO, though, they set a certain number of shares, to which they may be bought or sold, though exclusively through your broker. Perhaps this is where the problem all starts.
Brokers rely on commissions and nothing quite brings in a hefty commission like an IPO of a closed-end mutual fund. Usually around 5%, it tends to automatically make less bang for your buck as you witness your $10 per share shrink to $9.5. Another issue, perhaps due to the investors themselves, is that there tends to be far more value than it is perhaps worth. There are many long forgotten stocks that may be well worth the $7 per share and are just as likely to succeed as the newer IPO of $10, yet they tend to be lost in the mix. I say lost not to point out the obvious incentive for your broker not to make you aware of these options (commission = 5%, just a reminder).
Finally, these IPO’s of closed-end mutual funds tend to be exchanged towards the peak of the daily market. This is a terrible idea as most 101 Econ students can tell you: the chances of it going up are slim and the chances of going down are astronomical. For all of these reasons then, it goes to show you why this year has been disastrous for the IPO’s of closed-end mutual funds. From January to April, there have been 13 IPO’s of closed-end mutual funds. They raised over $5 billion and have, so far, decreased in value by 22%.
Everyone wants to play a wiz-kid on the market, the fortuneteller who can just sniff out the opportunity right before anyone else realizes it. Yet a rule of thumb to always remember is that the stock market is not intended to be treated like a casino: rather, it’s an investment. It would be wise for the average, dad investing for the family, as well as the Wall Street guru’s, to remember this point: there are no “get rich quick schemes”. I’m sure many would disagree however the best I can say is to invest at your own risk because believe me, the numbers are not in your favor.