“Your ticket is being issued,” that’s what I saw flashing on the ticket machine this morning at the entrance to the parking lot after I selected ‘issue a ticket’. I wasn’t the least excited, just patiently waiting for my ticket. However, when the word ‘issue’ is mentioned around people who are in the capital markets, you see their faces light up, including myself, and the second they hear it, they ask, “What issue?”, “Is an IPO on the way?”
It’s not just momentary excitement, it’s an excitement that repeats itself every time there is a date for a new issue. In most cases, the date of the issue is published just a few days before and from that moment, the excitement begins.
What is an Initial Public Offering (IPO)?
You may be wondering what’s so exciting about IPOs, but before we get into that, let’s start with an explanation of what the terms ‘issue’ and ‘offering’ refer to and what they mean. Issue and Offering are often short for Initial Public Offering or IPO. The basic definition of an IPO as stated on Investopedia is:
‘An initial public offering (IPO) is when a private company sells shares of its stock for the first time to the public and becomes a public company. When a company makes this transition, it is no longer in the hands of the private owners and investors but is now under public ownership. An IPO allows a company to raise equity capital from public investors.’
In simple terms, when a private company wants to grow, it can choose to raise capital from the public by issuing a portion of the company’s shares and thus converting it from a private company to a public company (going public). However, despite the process sounding straightforward, it is a major event. It involves the complete transparency of financial documents, selection of underwriters (the banks that will manage the process), the decision on the value of the issue, number of shares to be issued and much more. An intricate but important step towards going public.
Notably, if you ask the owners of the issuing company, for them this is only a significant milestone and not the end goal. For the initial investors of the company on the other hand, this is a very significant event – They are being recognized and rewarded for their success in investing early, a seal of approval you might say. Why is it so significant? Because if a company has reached the stage where it is issued and traded on the stock exchange, which is considered prestigious and gives admirable status to the company.
So why then is the IPO event itself considered exciting and attractive for independent traders? A new issue on the stock exchange is like the release of a new product that didn’t exist before. You can’t know what will happen to this product for sure but what is certain, it will arouse interest, curiosity, and enthusiasm because it is completely new.
One of the best examples of a new product that managed to create a huge buzz is the fidget spinner. At first the spinner was sold for 2-3 dollars per unit on platforms like Amazon, eBay, and AliExpress, but then because of the huge demand for this new product, its price reached a peak of 10x that online and in store!
This is a great example because the fidget spinner didn’t even exist before and from the moment it came out into the world, the enthusiasm around it was phenomenal.
The same story happens about once a month in the capital market: a new company announces its IPO, a date is set, and next we have what is referred to on Wall Street as a “road show”. This is where the hype is created, it’s a huge marketing campaign put on by the Underwriters and the Management in preparation for the special and exciting day, the day of the IPO.
IPO day
Now we have arrived at the IPO day, and in most cases, to generate buzz and anticipation for the opening, it will not begin with the start of the trading day, but rather between one to three hours later. They wait for the market to open, for the pressure from the start of trading day to calm down, and only after that they make the move, press the red button and here it happens, the stock starts trading on Wall Street!
Finally! We have the exciting event that every trader and investor has been waiting for. We have a chart, volume and the stock begins to trade. Normally the stock opens with very high volatility, especially in the first few minutes as it tries to find its equilibrium. Then it makes its move, and, in most cases, it ends the trading day with gains.
Offering Price vs Opening Price
Before we go any further, it is important to understand that any company that goes public has two distinct prices. First, we have the offering price, i.e. the price at which it chose to issue and start trading on the stock exchange, for example, $20 per share. Then there is the opening price, which is the price the stock starts trading at. In most cases, the opening price is at a significant difference from the initial offering price.
Why? There is only so much supply and a long line. Many times, people stand in line just to be part of the offering, just to buy this exciting product that has been released to the world and that demand drives up price. Sometimes, regardless of the quality of the gadget or the financial numbers of the issuing company, the enthusiasm is astoundingly high, just because there is something new in the market and everyone wants to take part in it. That’s why in over 70% of cases (out of the last 1,000 IPOs), IPOs are opened at a price higher than the offering price!
It is also important to note that for the most part, trading in IPOs is considered very volatile, very stressful and therefore also very risky. The new stock does not have too much history in the chart, so it is difficult to know what the future holds for it.
How do I participate in an IPO? Can I purchase at the offering price?
To receive shares of a company that is about to go public at the offering price is something very exclusive and usually accessible only to investment houses or large institutional entities, and ultimately offers a very attractive possibility. The ability to purchase shares of a company going public at the offering price is often quite rare to anyone outside those groups.
If you want to participate in an IPO and be entitled to receive shares at the offering price, you can do it in very few places, and Colmex Pro is one of the companies that allow you to do it!
In conclusion, IPOs have always been the way for companies to grow and the enthusiasm for them has remained very high for decades. Just think about it, all the top growth companies on the stock exchange had once IPOs! And there’s many more to come. The next IPOs that are expected to launch on Wall Street are Reddit, Discord, Starlink and others.
We do not guarantee that the offering will be successful or even that the offering will open at a higher price than the offering price, but we guarantee that once you are part of the event and hold shares at the offering price, the enthusiasm will be very high!
Good luck!
