Arm Holdings’ IPO: A Risky Bet for Retail Investors
Arm Holdings, the British chip designer, is set to begin trading this week in what could be the biggest IPO of 2023. However, retail investors should proceed with caution. Recent history has shown that individual investors often lose money when they jump on hot IPO listings. The 10 biggest U.S. IPOs of the past four years are down an average of 47% from their first day closing price. Only two of these stocks are up from their IPO prices. With Arm focusing its marketing efforts on institutional investors, retail investors may end up buying shares at potentially higher prices once they hit the market.
The Perils of Buying into Blockbuster IPOs
Buying into blockbuster IPOs on Day One can be perilous, as the analysis shows. Even institutional investors who bought into the top 10 IPOs before trading would be down an average of 18%. In contrast, the S&P 500 has gained an average of 13% since each of those IPOs. Jay Ritter, a professor at the University of Florida, advises retail investors to consider buying and holding low-cost index funds instead of individual stocks. Arm’s IPO, along with an upcoming listing from Instacart, is expected to rejuvenate a lackluster IPO market that has slowed in recent years.
Retail Investors More Cautious After Stock Market Sell-Off
Retail participation in U.S. stocks surged in 2021, fueled by low interest rates, zero-cost trading apps, and social media hype. However, retail investors have become more cautious after last year’s stock market sell-off. While some retail investors may be interested in the Arm IPO, it is unlikely to reach the levels seen in 2021 IPOs. The IPO market has been challenging in recent years, with many companies experiencing poor returns. IPOs with market values above $1 billion are down an average of 29% from their offering prices and 49% from their initial trading highs. Despite this, chipmaker GlobalFoundries has been a standout, gaining 23% since its 2021 listing.
