Young listed firm has lower investor confidence in short term but higher investor confidence in longer term?

Question

Most of the investors may not prefer investing in young listed stock as it is high risk. For example, on the merger announcement day, investors may not invest in this stock as they think that these stock do not have lots of investment potential (they may prefer investing in stable blue chips). However, later on, investors seem to realise the development potential for this young firm as young firms have higher development potential in the longer run. Therefore, investors like investing in young stocks a few days after the annoucnemet day. What do you think?

Answer 1

Interesting question. Firstly as new listed companies, to a certain degree, the initial investor reaction depends on the company itself. Visa floated for the first time recently and having been a coming for as long as I can remember, the initial reaction was very positive. But then for companies that have little to no public awareness, then I guess it will take time to get one's name around the corridors of the stock exchange. Personally the problem, though not necessarily coming from my own method of working out if a company is a good buy or not, is that new companies have no history you can compare their current performance to. A lot of investors like to see where a company has come from before they know where it goes. This lack of history will raise some doubt, not about the company's validity but rather about it's past performances. Also, incentive to float is a big question, in my opinion at least. Is the company just looking to raise some more working capital in a vain attempt to make itself grow or is it generally concerned to develop into a more effecient profit making business which is in need of funds for the progress? I don't like newbies who have no realistic chance of providing for it's share holders with dividends or increasing annual profits which in turn pushed up the share price. Mine is just one opinion of many, I'm sure. Good question though.