Question

Explain why it is difficult for individual retail investors to profit from IPO underpricing

Answer 1

Usually in an IPO, a small percentage (3-5%) is reserved for individual retail investors.

If the IPO is under-priced, there is likely to be huge over-subscription for the IPO. In case of over-subscription, the likelihood of any individual being allocated shares is slim as the available shares have to be allocated over a large number of applicants.

Hence, if the IPO is under-priced, it is difficult for individual retail investor to profit because it is difficult for individual retail investors to be allocated shares in the IPO due to heavy over-subscription.

However, in the case of institutional investors, they have better chances of being allotted shares in the IPO, and hence they have a better chance of profiting from IPO under-pricing