A company listing on the share market is not a bargain simply because it is new. At an IPO, the price is set by the people selling the shares, and they have every reason to set it as high as the market will bear. The useful question for an investor is therefore not whether the business is good, but whether the price is fair, and who stands to benefit if you pay it.

Why the IPO price is rarely the low price

The phrase “getting in on the ground floor” suggests a new listing starts cheap and only rises. In practice, the opposite is common. A company may have a sharp run on its first day while enthusiasm is high, then drift back as the excitement fades. Some fall on day one. One analysis of recent listings found that only around 30 per cent were trading above their issue price at the end of the first day.

The reason is structural. An IPO is a sales process. Advisers work out the story, the company’s vision is packaged for investors, and the aim is to raise the most money at the highest valuation. A float or capital raising is the one moment the business itself receives cash. After listing, shares change hands between buyers and sellers, and none of that money reaches the company. Existing shareholders, such as founders and early backers, may also use the float to sell some or all of their holding.

The incentives run deeper. Brokers typically earn around 0.2 per cent on ordinary share trades, but may earn six to eight per cent of the money raised in an IPO. That justifies a great deal of effort in building momentum and sentiment. By one estimate the typical listing of recent years has been small, around $50 million in market capitalisation, so a very large float is a significant payday for many parties. None of this makes the people involved dishonest. It does mean an investor should not mistake enthusiasm for evidence.

Reading a prospectus for motive

A prospectus is meant to give investors the information they need, but it is also a marketing document. Read it for motive as well as numbers.

Start with why the company is raising money. A founder expanding into a new territory, building facilities or making an acquisition is a different proposition from existing owners who want to cash out, perhaps because they are getting older and want liquidity. Often it is a mix. The split between new money going into the business and money going to sellers is worth working out, because no one will volunteer it in plain language. If a large share of what is raised goes to existing owners, ask what they know that you do not.

Then test the numbers. How were the revenue assumptions built, and how demanding are they over the next couple of years? How concentrated is the customer base? A handful of clients means one departure can change everything. Look at the valuation relative to sales as well as earnings. Many floats are not yet profitable, so price to sales is often the only yardstick, and a company priced at fifty times sales or more is being priced for extraordinary growth. That can happen, but the benchmark is very high.

Finally, consider the people. A shareholder is a part owner, so management’s record matters. If there are serious questions about whether leaders put their own interests ahead of shareholders, there is little further analysis to do. Capital is limited, and there are plenty of other companies to consider.

Why the biases work against you

IPOs combine several well-documented behavioural biases. The first is anchoring: the company announces it is worth, say, $100 million, and that figure becomes the reference point for everything that follows. The second is social proof: a friend is buying, calls to say it is a great investment, and the instinct is to join in. The third is scarcity: a limited number of shares in circulation makes them look more desirable. Each of these pushes towards acting quickly, which is the opposite of what careful analysis requires.

Price discipline matters more than it looks. If the initial price is wrong, the wait to get back above water can be long. The fear of missing out is among the costliest feelings an investor can have, because it pictures a share price that only goes up. It does not. Prices fluctuate, and good businesses usually offer more than one chance to buy.

Green lights, and the case for waiting

None of this means every IPO should be avoided. There are genuine reasons to list. A company may want to meet compliance requirements, win government contracts that favour listed entities, or give owners who want to keep running the business a way to fund new projects. Positive signs include owners who keep a meaningful stake, long-term incentives for management, recurring revenue, an existing profit and low debt.

Even then, waiting costs little. Moving from private to listed life is a significant transition for management, with new stakeholders and different accountability. Watching a company through at least one economic cycle shows how it handles pressure, and ten years of steadily growing cash and profits is far more informative than a forecast. A great business can still be a poor investment at the wrong price, and a less glamorous business with years of proof can be a better use of capital than a famous one with a story.

The same logic applies to technology and growth themes. Valuations that assume a company can sell the same product at the same cost for decades ignore how quickly technology changes and costs fall. Where an investor cannot assess an industry with confidence, doubling down on areas of genuine knowledge is sounder than outsourcing judgement.

The best storytellers attract the most capital, which is the strongest reason to be selective. Ask who has evidence, and allocate capital on the proof. A listing that earns its price will still be there once the excitement has passed.

Teaminvest Takeaway

At Teaminvest, we treat a new listing like any other company: it has to earn its place. Our belief is that volatility is a friend, that great research is slow, and that action is only worth taking fast when price meets value. If a quality company is missed at a fair price this time around, it has a habit of coming back within 12 to 18 months. That is why Conscious Investors® are comfortable letting the excitement settle and the evidence build before they commit.

General information only, not personal financial advice. Teaminvest Pty Ltd, part of TIP Group, AFSL 334339. Statistics are drawn from industry commentary and should be checked before relying on them.