IPO investors: Why the rush to sell might be a missed opportunity
Subscribe to enjoy similar stories. Attractive assets typically command higher prices as investors prefer to hold them. However, the landscape of India’s initial public offerings (IPOs) is beginning to reflect a troubling divergence from this age-old wisdom.
A recent study by the Securities and Exchange Board of India (Sebi) reveals that investors are increasingly driven by behavioural biases, with many choosing quick exits over long-term holds. The study analysed 144 IPOs listed between April 2021 and December 2023, uncovering a striking trend: 54% of IPO shares (by value) were sold within a week of listing, and 70% within a year. This behaviour runs counter to the typical design of IPOs, which are structured to showcase the long-term prospects of a stock.
But as the data shows, the majority of investors seem to be chasing short-term gains. Read this | Swiggy IPO: How investors justify risky pre-listing trading For IPOs delivering strong listing gains, the trend is even more pronounced. IPOs that gained more than 20% within the first week saw 67.6% of their shares sold by value within seven days.
In contrast, IPOs with negative returns saw only 23.3% of shares sold, highlighting the tendency to "lock in" profits early to avoid the fear of losing gains. At the core of this behaviour is the 'Disposition Effect,' where investors are quick to sell winners while holding on to losers. Behavioural finance experts caution that this bias stems from emotional rather than rational decision-making, often leading to suboptimal outcomes.
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