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

Expert Solution

IPO underpricing generally do not profit the retail investors due to multiple reasons.

One very obvious reasons for this is due to the information asymmetry that exists between retail and institutional investors for a new firm which is coming up with an IPO. Unlike a firm which is being traded in market, for a new firm, the information with respect to the company, growth prospects etc are more with institutional investors who has more manpower and technological support for growth estimation. Thus they benefit more from being able to time better and execute faster transactions

Another reason for retail investor not being able to profit much is due to the underwriters tendency to favor a institutional investor over a retail investor. This can be due to better relationships with institutional investors or could be because the underwriter bias to favor it's long term clients.

Regulations and more transparency in market place can help remove such inconsistencies and help retail customers gain a better playing ground.

jeff jeffy answered 2 years ago

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