When a company decides to raise money through an IPO, they have decided that the prospects for future growth are high, and many public investors will line up to try to get in on the offering. Those who receive an IPO allocation are able to purchase at the IPO price, which is usually below the market price when it eventually starts trading on an exchange.
When an IPO is oversubscribed, it means that more people demand shares of an IPO than the number of shares being offered. Getting in on a hot IPO that is oversubscribed is incredibly difficult. This is where the underwriter comes in, you have to think of their underwriter as the gate-keeper.
One of the first steps in the IPO process is to hire an investment bank. Underwriting is the process of preparing for and raising money via either debt or equity. Underwriters are like the middle-man between companies looking to go public and investors. The underwriter markets and sells those initial shares. Some of the most active underwriters are Morgan Stanley, Goldman Sachs, Credit Suisse, Citi and J.P Morgan.
When an investment bank is selected, the company going public works with them to get their laundry list of financials and corporate information ready to file with the SEC.
Once the offering’s financials are filed, the SEC carries out due diligence to make sure all material information has been disclosed. Once the SEC approves the offering, a date is set when the stock will be offered to the public.
IPO Performance
Best and worst performers: YTD | One Year| MNDR | +494.5% | ||||
| MFI | +132.0% | ||||
| SMXT | +108.5% | ||||
| ALAB | +98.9% | ||||
| CGON | +90.5% | ||||
| MGX | -55.1% | ||||
| GUTS | -55.2% | ||||
| TWG | -60.0% | ||||
| INTJ | -67.0% | ||||
| JL | -83.0% |
| MNDR | +494.5% | ||||
| SEZL | +325.6% | ||||
| RYZB | +247.2% | ||||
| CAVA | +184.5% | ||||
| SWIN | +181.8% | ||||
| AZTR | -95.6% | ||||
| HRYU | -96.0% | ||||
| TRNR | -97.4% | ||||
| SRFM | -97.7% | ||||
| LQR | -99.5% |
As the offering date approaches, the underwriter and company decide on the offering price. The offering price depends on what the company wants to raise, the success of the road show, anticipated demand for the IPO and current market conditions.
The road to an IPO is long and complex. You may have noticed that individual investors aren't involved until the very end. Small investors aren't the target market of the underwriters, they don't have the amount of money needed by the company and therefore hold little interest for the syndicate.
If underwriters think an IPO will be outperform, they'll usually make sure shares go to their favorite institutional clients at the IPO price. Typically the only way for an individual investor to get an allocation is to have an account with one of the investment banks underwriting the deal, or with a broker who has received an allocation and wishes to share it with their clients.
Even if you have an account, you often need to be a frequently trading client with a large account to get in on a hot IPO. Of course there are exceptions, but it’s REALLY difficult for individual investors to get access to an oversubscribed IPO. Just keep in mind that the probability isn't high.
HOWEVER. Large returns can be made off IPOs in aftermarket trading. After that first day pop, IPOs tend to settle down to reach a more realistic value, and outperform in the long run. Even if you can't get in on the offering at the IPO price, you can still make money in the aftermarket.
