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Playing IPOs (Initial Public Offerings)

Posted on July 7, 2020 by Elroy Bicking

When IPOs were a hot item, we were always asked,"How do I get in on one?" To be certain, you need to know about this sort of play since the returns can be enormous.

In an IPO, shares which will be publicly traded on open exchanges are made available to the public. Every company has shares, but until the registry and filings are complete they are not publicly tradeable. Usually a significant brokerage firm will"underwrite" or do the homework and history legwork involved in procuring shares, i.e. verifying financial documents, accounting and promotions, etc.. Then the broker will place the pricing of the shares coming to market.

Frequently a hot IPO will cost out at, say, 15 bucks per share, but due to the limited quantity of shares offered and the fervor over them, the stock never opens in the"pricing" cost. More times than not that 15-dollar IPO opens at $20 and flies from there.

Let's say you have 5,000 shares of the IPO. What would it take to get them from your hands? A higher price ? Certainly! So the purchase price goes up and you sell it to somebody else that wants it badly. But what will it take to pry it out if his palms? A higher cost, of course. So that cycle repeats, often many times in a brief time period, until it reaches a plateau. Then the problem becomes volatile, trading up and down in a tight selection.

The inventory will eventually settle down a bit since the issuing firm goes into its"silent period" if the underwriter is needed to remain mum about this new inventory for a time period. Following the silent period is over the broker that brought out the IPO usually starts an update campaign and the inventory then starts getting more attention and activity.

Naturally, everyone would love to have some stocks before they are opened, but there are few to be had. The business has shares, the underwriters have stocks, the market makers have stocks, and choose customers have stocks. Most times the available stocks are dispersed long before you ever hear about the IPO. If you get lucky enough to get inside was just that, pure luck.

Day traders with the best implementation systems can earn money on the IPO by jumping in shortly after it opens and riding the share price higher. You should be quick to take profits, however, since there can be several rapid cost swings during that day.

Another opportunity to exchange an IPO is in the end of the"lockup period."

The lockup rule affects mostly company insiders who control tens of thousands of shares at the low IPO price. They can't sell their stocks for 6-9 months. Until then, their stocks are"locked up"

As the end of the lockup period approaches, the inventory often begins a slow advance as institutions and insiders hype the business to be able to maximize their profits. But when stocks are no longer locked up, the quantity of selling is likely to increase as managers and underwriters bank some money. Based on the intensity of the selling, a stock may be brief candidate since the lockup period ends.

Any investor thinking of buying an IPO after it's started trading should know about the lockout date. If the stock has been trading nearly six months, it typically means that more inventory is coming to advertise at the end of the lockout period which could put a damper on the purchase price.

Needless to say, if the stock is a massive gainer and the company is poised for strong growth, the end of the lockout period might have little if any effect on share price. Investors need those stocks and do not worry about a few more stocks coming to market. And there will not be as many stocks by sold by insiders if the stock has done exceptionally well. Like everybody else, many insiders will hang on the actual winners.