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IPOs

post #1 of 87
Thread Starter 
I had a quick question about IPOs:

I know that the price of an IPO generally goes up, sometimes dramatically, before it hits the open market. Is this an instant jump, or does the price gradually rise during the "closed" (for lack of a better word) part of the IPO? For instance, if my broker says they can get me shares of an IPO, can I be assured I'll get them at the IPO price, or could I end up with shares priced anywhere from the IPO to the price when shares hit the open market?
post #2 of 87
Quote:
Originally Posted by NameBack View Post

I had a quick question about IPOs:

I know that the price of an IPO generally goes up, sometimes dramatically, before it hits the open market. Is this an instant jump, or does the price gradually rise during the "closed" (for lack of a better word) part of the IPO? For instance, if my broker says they can get me shares of an IPO, can I be assured I'll get them at the IPO price, or could I end up with shares priced anywhere from the IPO to the price when shares hit the open market?

Unless your broker is in the loop, he won't be able to get you the shares at the starting price. If he does get you shares its probably going to be while its rising, the earlier on in the day the better return you'll get. (that is considering that the IPO itself is good)
post #3 of 87
Thread Starter 
Quote:
Originally Posted by Saturdays View Post

Quote:
Originally Posted by NameBack View Post

I had a quick question about IPOs:

I know that the price of an IPO generally goes up, sometimes dramatically, before it hits the open market. Is this an instant jump, or does the price gradually rise during the "closed" (for lack of a better word) part of the IPO? For instance, if my broker says they can get me shares of an IPO, can I be assured I'll get them at the IPO price, or could I end up with shares priced anywhere from the IPO to the price when shares hit the open market?

Unless your broker is in the loop, he won't be able to get you the shares at the starting price. If he does get you shares its probably going to be while its rising, the earlier on in the day the better return you'll get. (that is considering that the IPO itself is good)

Gotcha. So it does rise before it hits the open market?
post #4 of 87
Is this another one of your trick questions? The answer is no, it doesn't really rise before it hits the open market. What happens, sometimes, lets not sink into the silliness that says IPOs always open above pricing, is that the original investors get it at the IPO price, and that their sell and the buyers' buy price may be, at the open, above the IPO price, but the price rises at the open, not before it, because before the open there is no market for the security. Also, the answer to your other question is that it depends who you are, and who your broker is. You can get shares at IPO price if they are available to you.
post #5 of 87
From a business' perspective who is trying to raise the most amount of capital for the least cost I would not want my IPO to be jumping at the bell. This means the bankers that are being paid millions to underwrite the IPO drastically undervalued the company at the time of the offering. If an IPO jumps 18% on the first day, that is 18% less capital that could have been raised for the firm.
post #6 of 87
^ +/-, when you factor in that no company will really price an IPO at $100. The CEO and all controlling shareholders aren't complaning that the money is going in their pockets and no the companies. Most of the time the insiders are looking to monetize their stakes in the company, so they don't care where the stock comes out but rather where it ends up.
post #7 of 87
I can see that logic there. Shareholders are buying for capital appreciation, not a stream of earnings due to actual capital investment.
post #8 of 87
Thread Starter 
Quote:
Originally Posted by iammatt View Post

Is this another one of your trick questions? The answer is no, it doesn't really rise before it hits the open market. What happens, sometimes, lets not sink into the silliness that says IPOs always open above pricing, is that the original investors get it at the IPO price, and that their sell and the buyers' buy price may be, at the open, above the IPO price, but the price rises at the open, not before it, because before the open there is no market for the security. Also, the answer to your other question is that it depends who you are, and who your broker is. You can get shares at IPO price if they are available to you.

No, it was not a trick question, just genuinely something I didn't understand and I was having trouble with my google-fu in trying to find the answer. And thank you for the answer, because what you said is exactly what I was looking for: to use the example of LNKD, the IPO price was $45, and it opened at $83 (or whatever). I was wondering if some of the investors/institutions participating in the closed part of the IPO were paying $50, $60, etc, all the way up to the opening price of $83. If I've understood you correctly, that's not the case. Everyone who purchases before it hits the open market purchases at the IPO price. That's exactly what I was looking for--thank you for the clear answer. I appreciate it.

And yeah, I understand it's generally fairly difficult to get shares at the IPO price. Out of curiosity, do you know if that's equally true for all IPOs, or is it easier to get shares of small-cap, less-well-known IPOs? Is it not meaningfully different for an individual investor? edit: I ask because I'd be interested in investing in some IPOs if I could -- and not big buzzworthy ones like Zynga -- but I don't know if it's any more realistic to think that as an individual investor (without a great deal of capital) would have an easier time with random small-cap IPOs.
post #9 of 87
Thread Starter 
Quote:
Originally Posted by patrickBOOTH View Post

From a business' perspective who is trying to raise the most amount of capital for the least cost I would not want my IPO to be jumping at the bell. This means the bankers that are being paid millions to underwrite the IPO drastically undervalued the company at the time of the offering. If an IPO jumps 18% on the first day, that is 18% less capital that could have been raised for the firm.
Quote:
Originally Posted by Beckwith View Post

^ +/-, when you factor in that no company will really price an IPO at $100. The CEO and all controlling shareholders aren't complaning that the money is going in their pockets and no the companies. Most of the time the insiders are looking to monetize their stakes in the company, so they don't care where the stock comes out but rather where it ends up.
Quote:
Originally Posted by patrickBOOTH View Post

I can see that logic there. Shareholders are buying for capital appreciation, not a stream of earnings due to actual capital investment.

Yeah, it does make sense. I mean, there must be some explanation, because it seems like IPOs are consistently "underpriced." IIRC, over the last nine months, the average gain from IPO to the open was just over 12%. From my limited reading on the subject, I guess there's a fair bit of academic literature on the subject of the consistent underpricing of IPOs. But don't take my word for it -- obviously I don't know much about this stuff.
post #10 of 87
Quote:
Originally Posted by patrickBOOTH View Post

From a business' perspective who is trying to raise the most amount of capital for the least cost I would not want my IPO to be jumping at the bell. This means the bankers that are being paid millions to underwrite the IPO drastically undervalued the company at the time of the offering. If an IPO jumps 18% on the first day, that is 18% less capital that could have been raised for the firm.
Quote:
Originally Posted by NameBack View Post






Yeah, it does make sense. I mean, there must be some explanation, because it seems like IPOs are consistently "underpriced." IIRC, over the last nine months, the average gain from IPO to the open was just over 12%. From my limited reading on the subject, I guess there's a fair bit of academic literature on the subject of the consistent underpricing of IPOs. But don't take my word for it -- obviously I don't know much about this stuff.

IPOs are sometimes underpriced to ensure all shares are sold. Remember the company is trying to sell the shares and cannot ask for a premium in some cases. The banks that set up the IPO generally underprice to ensure every share sells without any delays.
post #11 of 87
True, but it shortchanges the firm raising the funds. I personally feel that most companies are insane for going public anyway. It is the most expensive form of financing and you have the deal with shareholders.
post #12 of 87
Quote:
Originally Posted by patrickBOOTH View Post

True, but it shortchanges the firm raising the funds. I personally feel that most companies are insane for going public anyway. It is the most expensive form of financing and you have the deal with shareholders.

I don't think its as bad as you say it is. It is much better than putting a company in way over its head in debt.
post #13 of 87
Quote:
Originally Posted by NameBack View Post


No, it was not a trick question, just genuinely something I didn't understand and I was having trouble with my google-fu in trying to find the answer. And thank you for the answer, because what you said is exactly what I was looking for: to use the example of LNKD, the IPO price was $45, and it opened at $83 (or whatever). I was wondering if some of the investors/institutions participating in the closed part of the IPO were paying $50, $60, etc, all the way up to the opening price of $83. If I've understood you correctly, that's not the case. Everyone who purchases before it hits the open market purchases at the IPO price. That's exactly what I was looking for--thank you for the clear answer. I appreciate it.

And yeah, I understand it's generally fairly difficult to get shares at the IPO price. Out of curiosity, do you know if that's equally true for all IPOs, or is it easier to get shares of small-cap, less-well-known IPOs? Is it not meaningfully different for an individual investor? edit: I ask because I'd be interested in investing in some IPOs if I could -- and not big buzzworthy ones like Zynga -- but I don't know if it's any more realistic to think that as an individual investor (without a great deal of capital) would have an easier time with random small-cap IPOs.

My understanding, and this is from a couple of years back because IPOs are not part of my strategy in any way, is that the average return from an IPO is no higher, and often lower, than the market itself. That said, sure, you can get some unwanted ones, and that isn't all bad, because the important metric is not how much something is worth, but the discrepancy, in your analysis, between the price and the value, or how your appraisal differs from that of the bankers. Still, I don't know that I would ever suggest the fact that something is an initial offering as a reason to buy, anymore than I ever understood a premium put on splits back in the roaring 90s.
post #14 of 87
Thread Starter 
Quote:
Originally Posted by iammatt View Post


My understanding, and this is from a couple of years back because IPOs are not part of my strategy in any way, is that the average return from an IPO is no higher, and often lower, than the market itself. That said, sure, you can get some unwanted ones, and that isn't all bad, because the important metric is not how much something is worth, but the discrepancy, in your analysis, between the price and the value, or how your appraisal differs from that of the bankers. Still, I don't know that I would ever suggest the fact that something is an initial offering as a reason to buy, anymore than I ever understood a premium put on splits back in the roaring 90s.

I agree that they often underperform in the long run; I think I saw a study that actually showed that over the last 20 years IPOs substantially underperformed the market, actually. In the short run, however, there's massive profit to be made. Unfortunately usually only large institutional investors are allowed to buy and flip IPOs in the first day, it seems (again, this is my not-super-informed impression of things). I was just playing with a historical dataset from the last 10 months or so, and it was just pretty clear from at least that sample that investing at-random in IPOs and flipping at the market-open price would generate pretty insane returns in short periods of time, assuming reinvestment -- and this held up (albeit to a lesser extent) even if you focused on smaller-cap firms. The strongest correlation (probably not surprisingly) was the difference between the proposed price range and the actual price of the IPO; and the change from IPO to open. I figure that any gain from the proposed price represents "buzz," but I found that if you limit the at-random investment solely to IPOs that don't experience a strong gain from proposed price to actual IPO listing, you still generate very large positive returns in just a few months. It also held up even if you sold at the close instead of the open on the first day, but gains were smaller.

Of course it's a small sample and I'm sure there are any number of places I could have made errors but it did seem like the persistent underpricing of IPOs is something close to free money for those big institutional investors who can flip the first day.
post #15 of 87
you are a great candidate for buying today's IPOs. they are just like your debt theories - who says they can't keep going up up up??
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