What Is a Hot IPO?
Let me explain what a hot IPO is—it's an initial public offering that sees a lot of demand from investors.
These IPOs get popular fast, pulling in huge interest from both investors and the media even before they launch. This kind of buzz usually pushes share prices way up right after the company goes public.
But remember, hot IPOs can be risky, especially if you're investing in companies without a solid history of success.
Key Takeaways
- A hot IPO is an initial public offering that grabs major media attention and investor demand.
- High demand causes sharp price jumps in the secondary market, but these aren't usually sustainable.
- Companies hire at least one bank to underwrite, handling pricing, marketing, and decisions on share numbers and price ranges.
- Demand exceeding supply in a hot IPO forces upward price revisions.
- Underpriced hot IPOs see stock prices rise after trading starts, while overpriced ones drop.
How Hot IPOs Work
When private companies decide to go public, they often issue stock through an initial public offering. This lets them raise a lot of money quickly, especially if it turns into a hot IPO. You're essentially cashing in on public demand for the shares.
The process starts with the company picking at least one investment bank as an underwriter. The underwriter markets the IPO and helps set the per-share price. They take on a certain number of shares to sell to institutional or retail investors, and they get a fee from the proceeds, known as the underwriting spread.
An IPO becomes hot when it draws heavy media attention, sparking investor interest. Going through this process means companies can pull in capital fast to pay debts, fund operations, and plan for growth.
With all that demand, stock prices often spike right after trading begins, but these increases don't last, leading to drops. This can shake up the market overall.
These price swings affect early shareholders once trading hits the secondary market. Underwriters might favor big clients with shares, so they take on risk if they overprice the stock.
Important Note
Don't assume a hot IPO is a sure thing for investors—the hype often doesn't deliver the expected returns.
Special Considerations
Hot IPOs draw investors who expect demand to exceed supply. When that's the case, it's oversubscribed, attracting short-term speculators and long-term holders alike.
Companies with hot IPOs often let underwriters expand the offering to include more investors and raise more money.
Underwriters have to balance the IPO size with the right price based on interest levels. Get this right, and it maximizes profits for the company and banks.
If a hot IPO is underpriced, expect a quick price jump as the market adjusts to demand. Overprice it, and prices fall fast, though the bank still profits from the initial sale.
Fast Fact
Companies can go public in other ways too, like through a direct listing or direct public offering.
Examples of a Hot IPO
Take Facebook's IPO as a classic example of a hot one. Back in early 2012, analysts said its long-awaited IPO aimed to raise about $10.6 billion by selling over 337 million shares at $28 to $35 each, expecting massive investor interest.
They predicted it would be oversubscribed.
On May 18, 2012, when the market opened, demand outstripped supply. To capitalize, Facebook upped the shares to 421 million and raised the price to $34 to $38 per share.
This move by Facebook and its underwriters increased both supply and price to match demand, reducing the oversubscription.
But it turned out Facebook wasn't oversubscribed at that price—the stock dropped sharply in the first four months and didn't trade above its IPO price until July 31, 2013.
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