> less sophisticated investors that aren't reading the financials
Do these actually exist? My understanding is that retail investors aren't significant and I don't believe that institutional investors don't look at financials.
Yes they're mostly neutral. But when the stock goes down that's still real people losing real money from their pension funds to what are essentially con artists. The saving grace here is as nradov said, they won't buy into IPO's.
Very few index funds purchase IPO shares. Companies that just IPO'd aren't listed in indexes; it takes a while for them to be added. Then the index funds buy on the secondary market.
In most IPOs, the vast majority of shares are allocated to institutional investors plus high net worth individuals who are favored customers of brokerages. Some of those buyers then flip their shares to retail investors just after the IPO for a quick low-risk profit.
