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.
