This IPO Stock Showed Why Investors Still Can't Trust the Market

The stock market didn't make any major moves on Tuesday, with the most widely followed indexes straying only a little from where they started the session. Investors didn't have a lot to do but wait for what the coming days will bring. In particular, comments from Fed officials at the annual Jackson Hole symposium should shed some light on what investors can expect on the monetary policy front in the coming months. The Dow Jones Industrial Average (^DJI 0.40%) and S&P 500 (^GSPC 1.02%) finished fractionally lower, while the Nasdaq Composite (^IXIC 2.02%) was about as close to unchanged as it could be.

Data source: Yahoo! Finance.

There are still a lot of unpredictable things happening in the market, and many of them are sapping retail investors' confidence. From short squeezes to meme stocks, irrational behaviors abound that make investing look more difficult. Tuesday's initial public offering for Starbox Group Holdings (STBX 4.04%) only added more fuel to the fire for those having trouble making sense of the stock market lately.

Another small IPO, another big jump

Starbox Group Holdings is a Malaysian company that's looking to build an ecosystem that small and mid-sized businesses can use for marketing and other services. With payment solutions, cash rebate programs, and digital advertising available, it aims to make it easier for retail businesses to attract customers and reward them for their loyalty.

Starbox's business is tiny. The company had just $154,000 in revenue in fiscal 2020, but its top line rose to $3.17 million in fiscal 2021. However, some investors are impressed that it has already managed to become profitable. With just $1.03 million in operating expenses, it booked net income of $1.43 million last year.

Coming into Tuesday's trading session, Starbox appeared ready to make a modest debut in the public market. Its IPO priced at $4 per share, with 5 million shares on offer. After the IPO, Starbox would have 45 million shares outstanding, implying a roughly $180 million market capitalization.

Investors had other ideas. With only a small portion of its outstanding shares available for buyers, demand was fierce. The stock opened at $27 per share, up 575% from its offering price. In its opening minutes of trading, it moved briefly above $40 per share, giving IPO investors a quick 10-bagger for their trouble.

Image source: Getty Images.

Easy come, easy go

Yet the floor quickly fell out from under those who chased those hard-to-get shares. In the ensuing hour, the stock price fell by more than half. By mid-afternoon, the shares came close to hitting $10, which would have represented a more than 75% drop in just a few hours.

In the end, Starbox stock closed Tuesday's session at $15.40 per share. That was still a healthy 285% rise from its IPO price, but it left plenty of investors who traded the stock throughout the day looking at significant paper losses.

Most troubling was the discussion among short-term traders on Twitter and other forums. Many people buying and selling shares quickly seemed to have no understanding of what Starbox's business was or of how it makes money. Instead, they were convinced that their playbooks for trading IPO stocks would work regardless of the company or its fundamentals.

Starbox might well have the capacity to become a successful business, rewarding those who bought shares at or shortly after its IPO. With all the hype that initial public offerings are generating right now, though, it's difficult for long-term investors to have any confidence about the market's behavior around those events.