IPO University

Stocks which were past high fliers that fell out of favor with investors and experienced a precipitous decline in price.

Derogatory term often used to describe short term investors and frequent traders. Also called hot money.

After the IPO has been priced, the company files a final prospectus with the SEC. This document contains the actual – not proposed – terms of the IPO. The final prospectus appears on EDGAR as Form "424B4" or "424B1" rather than the "S-1" filings associated with a preliminary prospectus.

The closing price at the end of the first day of trading reflects not only how well the lead manager priced and placed the deal, but what the near-term trading is likely to be. For example, IPOs that shoot up 100%+ on their first day of trading are likely to fall back in price on subsequent days due to profit taking. Conversely, IPOs that break offer price immediately are likely to drop further as institutions bail out. Breaking the IPO price right out of the box is a poor reflection on the lead manager’s pricing and placement. In most cases, however, IPOs average a first-day close that is about 10-15% higher than the offer price.

These are market participants that try to get shares of stock at the IPO price and immediately sell the shares in the aftermarket. While many flippers are small players looking for a point or two of quick profit, large, well-known mutual funds also practice flipping. It is a controversial practice because the underwriters want to control the trading in the IPO immediately after it goes public and the company wants their shares placed with long-term investors. However, flipping also provides liquidity for additional purchases of stock. The underwriters try to discourage flipping by placing stock in the hands of long term investors, particularly ones that have promised aftermarket orders. Brokerage firms try to curb flipping by individual investors by imposing waiting periods and fees on sellers and a penalty bid on the individual’s broker. However, the largest institutional investors and mutual funds continue to flip with impunity because of their great size and influence

When a company is publicly traded, a distinction is made between the total number of shares outstanding and the number of shares in circulation, referred to as the float. The float consists of the company's shares held by the general public. For example, if a company offers 2 million shares to the public in an IPO and has 10 million shares outstanding, its float is 2 million shares, or 20%. Tech and biotech IPOs sometimes issue a low float (5-10%), and the limited supply of shares then props up the price (but can lead to highly volatile early trading).

When a company that is already traded registers shares to be sold to the public via an underwritten offering. Like IPOs, follow-on offerings can consist of new primary shares that raise capital but dilute existing owners, secondary shares held by insiders that do not raise capital for the company or dilute other owners, or a combination of both. In addition, follow-on offerings increase the liquidity of the stock to attract additional holders and trading activity. Follow-ons are also referred to as secondaries, though technically that only applies to offerings sold by existing shareholders.

IPO shares set aside by underwriters to be allocated, at the behest of the issuer, to individuals and entities which have a close working or familial relationship with the issuer. These shares – often up to 5% of the deal – are sold at the IPO price. Examples include: directors, officers, suppliers, top customers, consultants, employee relatives, etc. This is typically defined in the prospectus as a Directed Share Program.