Hot IPO: What It Means, How It Works, Examples

Published

Wed, 2023-Dec-06 06:01:53

File Photo: Hot IPO: What It Means, How It Works, Examples File Photo: Hot IPO: What It Means, How It Works, Examples

What is a hot IPO?

A hot IPO is an initial public offering with high demand. Popular IPOs get investor and media attention before their market debut. This buzz and attention usually boost share values once the firm goes public. Investing in hot IPOs from unproven firms might be dangerous.

How do hot IPOs work?

Private firms seeking public exposure often issue stock through an IPO. IPOs can quickly generate significant funds if they garner public notice and become famous. An IPO allows private companies to capitalize on public demand for their shares.

First, the firm must locate an investment bank to serve as an underwriter. Underwriters market the IPO and help determine a per-share price. Banks assume a certain number of shares to sell to institutional or individual investors. Banks charge a fee, the underwriting spread, for the selling profits.

When media coverage is high, IPOs are hot and attract investors. Through the hot IPO procedure, firms may quickly obtain significant funds. This lets them pay off debts, fund operations, and save for expansion.

Hot IPOs often significantly surge stock prices once trading begins due to heightened demand for shares. This quick share price spike is generally unsustainable, causing a crash. 2 This trend can significantly affect the market.

Sharp price changes might impact initial stockholders when secondary market trading begins. In a hot IPO, underwriters may favor high-value customers, so they risk overpricing the stock.

A hot IPO may not ensure investor success due to unanticipated outcomes.

Special Considerations

Investors choose hot IPOs when they expect demand for shares to exceed supply. Oversubscribed IPOs attract short-term speculators and long-term investors.

Hot IPOs are routinely oversubscribed, so corporations let their underwriters expand the offering size to attract more investors and make more money.

Underwriters must balance IPO size and pricing with interest levels. A proper balance maximizes profits for both the corporation and its underwriter banks.

Hot low-priced IPOs sometimes see a quick price increase as the market reacts to high demand. Even though the underwriting bank only earns money on the initial issuance, overpricing the IPO might cause values to plummet.

Company options for going public include direct listing or direct public offering.

Hot IPO Examples

Social media giant Facebook’s IPO is a popular one. In early 2012, experts predicted considerable investor interest in its IPO, which aimed to raise $10.6 billion by offering over 337 million shares at $28 to $35 per share.

These analysts projected an oversubscribed IPO.

Upon market opening on May 18, 2012, investor demand exceeded supply for the company’s shares. Facebook issued 421 million shares to meet investor demand in the oversubscribed IPO. However, it lifted the share price to $34–$38.

Due to demand, Facebook and its underwriters increased share supply and price, reducing oversubscription.

As the stock plummeted in its first four months, Facebook was not oversubscribed at its IPO price. The stock did not exceed its IPO price until July 31, 2013.

Conclusion

Hot IPOs attract media and investor attention.
Secondary market price rises due to more demand are usually unsustainable.
Companies use a bank to underwrite, manage pricing, market, and determine share quantity and price range.
When demand exceeds supply, a hot IPO must raise the price.
After trading begins, underpriced, hot IPOs will likely see their stock price soar, while overpriced ones will decline.

Popular Post

Alan Greenspan: Brief Bio, Policies, and Legacy

By Anna Kovalenko, 6 min read

Alan Greenspan: Brief Bio, Policies, and Legacy American economist Alan Greenspan presided over the Federal Reserve’s Board of Governors from 1987 to 2006, serving as the country’s central bank. He also held the position of chair of the Federal Open Market group (FOMC), the Fed’s main group for formulating monetary policy and controlling the nation’s... Read more

Advance Payment: What It Is, How It Works, Examples

By Isiah Goldmann, 3 min read

What Is a Payment in Advance? A payment known as an advance payment is made before the due date, for example, by paying for a good or service before you receive it. Sometimes, merchants want upfront payments as insurance against nonpayment or to cover the seller’s out-of-pocket expenses for providing the good or service. Advance... Read more

What is aggregate stop-loss insurance?

By Isiah Goldmann, 2 min read

What Is Aggregate Stop-Loss Insurance? The aggregate stop-loss insurance policy limits claim coverage to a certain amount. This coverage protects self-funded plans from catastrophic (particular stop-loss) or multiple (aggregate) claims. Aggregate stop-loss protects employers from unexpected claims. When claims exceed the aggregate limit, the stop-loss insurer pays or reimburses the employer. Aggregate Stop-Loss Insurance Self-funded... Read more

Allotment Definition, Reasons for Raising Shares, and IPOs

By Sidney Schevchenko, 6 min read

Allotment Definition, Reasons for Raising Shares, and IPOs The systematic allocation or assignment of resources inside a company to different organizations throughout time is referred to as allotment. In the context of an initial public offering (IPO), allotment refers to the distribution of equity, particularly shares awarded to a participating underwriting company. When new shares... Read more

What Is an Agent? Definition, Types of Agents, and Examples

By Sidney Schevchenko, 8 min read

What Is an Agent? Definition, Types of Agents, and Examples A legal agent is someone authorized to act on behalf of another. Agents can represent clients in negotiations and other third-party activities. The agent may make decisions. Attorneys defend their customers in legal problems, and stockbrokers help investors make investment decisions. The agent represents the... Read more

Allocated Loss Adjustment Expenses (ALAE) Definition and Examples

By Isiah Goldmann, 3 min read

Allocated Loss Adjustment Expenses (ALAE): What Are They? A single insurance claim’s processing fees are known as allocated loss adjustment expenses (ALAE). The expense reserves of insurance include ALAE. It ranks among the biggest expenses for which an insurer must set aside money along with potential commissions. Allocated Loss Adjustment Expenses (ALAE): An Overview The... Read more

After-Hours Trading: How It Works, Advantages, Risks, Example

By Isiah Goldmann, 8 min read

After-Hours Trading: How It Works, Advantages, Risks, Example After-hours trading is securities trading that starts at 4 p.m. U.S. Eastern Time after the major U.S. stock exchanges close. The after-hours trading session can run as late as 8 p.m., though volume typically thins out much earlier in the session. Trading after-hours is conducted through electronic... Read more

What are agency costs? Included Fees and Examples

By Anna Kovalenko, 3 min read

What are agency costs? Included Fees and Examples Agency costs are internal company expenses resulting from an agent’s actions on behalf of a principal. Agency expenses often follow basic inefficiencies, dissatisfactions, and disturbances like shareholder-management conflicts. Agency costs go to the acting agent. Understanding Agency Cost When senior management and shareholders clash, agency expenses might... Read more

THE BIZNOB – Global Business & Financial News – A Business Journal – Focus On Business Leaders, Technology – Enterpeneurship – Finance – Economy – Politics & Lifestyle

Table of Contents