Sep
11
2023
What Is the IPO Process?

What Is the IPO Process?

By | Growing Wealth, invest, Investing | Comments Off on What Is the IPO Process?

Before a private company can make its shares available to the public for investment, it must go through the initial public offering (IPO) process. The IPO process is time-consuming, expensive, and it can take months or even years for a privately held company to reach the stage where it can be listed and traded on a public exchange.

An IPO marks the first time individuals other than angel investors or venture capitalists can make investments in a company. Once the initial public offering process is complete, traders can buy or sell shares in the company through a public exchange like the New York Stock Exchange or Nasdaq.

There are different reasons a company may choose to do an IPO, but it’s often used as a means of raising capital. The initial public offer process can also help raise visibility around a particular company’s brand, helping to fuel growth. It means that ownership of the company is transitioning from founders and a few early investors to a much larger group of individuals and organizations.

From an investor standpoint, getting in on the ground floor of a new initial public offering might be appealing if the company you think has the potential to take off. If you’re interested in how to buy IPO stock, this primer explains how the IPO process works step by step.

Key Points

•   An initial public offering (IPO) is the process a private company goes through to make its shares available to the public for investment.

•   Companies may choose to do an IPO to raise capital and increase visibility around their brand.

•   Prior to an IPO, a company must select an underwriter to conduct due diligence and sign necessary contracts.

•   The SEC must review and approve all documents before the company can launch its IPO.

•   After the launch, the underwriter may take direct action to stabilize the share price during the 25-day “quiet period”.

A Quick Refresher on IPOs

Again, IPO stands for initial public offering. If a company launches an IPO, it means that it’s only had private investors, such as angel investors, up to that point but it’s now ready to let other investors purchase shares. Under federal securities laws, this can’t happen until the company is properly registered with the Securities and Exchange Commission (SEC).

An IPO can help companies raise capital as an alternative to other methods, such as crowdfunding, which also involves raising funds from a pool of investors. But unlike an IPO, it doesn’t involve the buying or selling of shares in a company.

💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

How Does the IPO Process Work?

At a glance, the initial public offering process seems relatively simple: A private company makes its shares available to the public for the first time, hence why it’s often referred to as “going public.”

But the initial public offering process is more detailed and complex than that. There are specific steps that have to take place to ensure that an IPO is completed in accordance with SEC regulations. The company, either on its own or while working with analysts and investors, must value the company and set an initial public offer.

After completing due diligence, the company can move forward with an IPO announcement and choose an IPO launch date. Investors can then review the IPO prospectus to determine whether they want to invest or not.

The entire IPO process can take six months to a year or even longer to complete. Aside from being time-consuming, it can also be costly, so companies must have some degree of certainty that the IPO will succeed before undertaking it.

7 Steps of the IPO Process

The IPO process takes time, and it’s important for all parties involved that the appropriate steps be followed. If something is missed or overlooked, that could put the success of a company’s initial public offering in jeopardy. Here are the steps they must go through:

1. Choosing an Underwriter

Before starting any of the other IPO process steps, a company first has to connect with a reputable IPO underwriter or group of underwriters. Again, these are investment banks that are registered with the SEC to offer underwriting services.

When choosing an underwriter, companies can consider a variety of factors, including:

•   Reputation

•   IPO track record

•   Research quality

•   Industry expertise

•   Distribution (i.e. what type of investors the bank will be able to distribute the initial public offering to)

Companies may also weigh any prior relationship they have with a particular investment bank or banks when deciding which one(s) to use for underwriting.

2. Due Diligence

During the due diligence phase, the IPO underwriting team will conduct background research into the company and its upper management. This ensures that there are no surprises prior to or during the IPO launch that could affect share pricing.

At this step in the IPO process, the underwriter and the company will sign necessary contracts specifying the scope of services provided. The contract can take several structures:

•   Firm Commitment: In this type of arrangement, the underwriter agrees to purchase the IPO and resell shares to the public. This guarantees that the company receives an agreed-upon amount of money.

•   Best Efforts: With this type of agreement, the underwriter assents to selling shares to the best of its ability, though there’s no guarantee that all shares will sell.

•   All or None: In an all or none or agreement, all shares of the IPO must be sold or the offering is canceled.

In some cases, a group or syndicate of underwriters can come together to oversee the IPO process and manage risk. Each bank in the syndicate can sign a contract with the company to sell part of the IPO.

The underwriters will also initiate the registration process with the SEC and complete supporting documents for the IPO. These might include:

•   Engagement Letter: An engagement letter typically includes a clause stating what expenses the company will reimburse to the underwriter as well as the spread that’s used to pay the underwriter’s fees, typically 7% of proceeds.

•   Letter of Intent: This letter outlines the underwriter’s commitment or obligations to the issuing company, the company’s statement of commitment to cooperate with the underwriter and an agreement to provide the underwriter with a 15% over allotment option.

•   Underwriting Agreement: The underwriting agreement binds the underwriter to purchase shares from the issuing company at a specified price.

•   Red Herring Document: A red herring document contains some of the same information about the IPO that’s included in the IPO prospectus, excluding the price and number of shares being offered.

•   S-1 Registration Statement: This is the document that’s submitted to the SEC to register the IPO and it must include relevant information about the company that must be included in the prospectus, as well as additional details that are not made available to the public.

3. SEC Review and Road Show

At this stage of the initial public offering process, the SEC will review all of the documents submitted for the registration. Meanwhile, the company and its underwriting team will prepare for the road show.

This road show is effectively a marketing strategy in which the underwriters attempt to gauge interest in the IPO from institutional investors. This can help underwriters to set the IPO price and determine what number of shares to offer.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

4. IPO Pricing

Once the SEC has approved the IPO, the next critical step is choosing an initial share price. In terms of how an IPO price is set, this can depend on a number of factors, including:

•   Company valuation

•   Anticipated demand for shares among investors

•   Road show outcomes

•   Market conditions

•   How much capital the company hopes to raise

•   The company’s reputation

Pricing is important because it can determine the success or failure of an IPO. Price an initial public offer too high and it may scare off investors; price it too low and the company may not reach its target goal for capital raised once shares go on the market.

5. Launch

Once an IPO has the SEC’s approval and the number and price of shares has been set, all that’s left to do is launch. The company or underwriters typically announce ahead of time when an IPO is set to list so interested investors can ready themselves to buy shares on that date.

6. Stabilization

Stabilization refers to the underwriter taking direct action to stabilize share prices once the IPO launches. This is something underwriters can do during the 25-day window after an initial public offering hits the market, otherwise known as the quiet period.

In essence, the underwriter can execute trades during this period in an effort to influence pricing in favor of the company. Any SEC restrictions against price manipulation are temporarily suspended during this time.

SEC rules do, however, still apply to investors who owned shares before the company went public. Specifically, they’re required to observe the IPO lock-up period rule. This rule prevents them from selling any shares they own in the company for a set time period after the IPO, typically 90 to 180 days. This keeps those investors from dumping their shares prematurely which could affect share prices.

7. Transition to Market Competition

After the initial 25-day period following an IPO launch, the underwriters take their hands off the wheel. Rather than relying on the prospectus to determine valuations, shareholders turn their attention to market movements instead. The underwriter can continue acting in an advisory role but at this point, they can no longer do anything to influence pricing.

What Parties Participate in the IPO Process?

It takes a team to successfully launch an IPO, and each member has a distinct role in the initial public offer process. The company is the star player around which the team revolves around, with senior management typically taking the lead.

But an IPO also requires assistance from other professionals. Understanding who is involved and what they do can help with navigating the steps of the IPO process.

Investment Banks

One role of an investment banker, also called underwriters, is to effectively oversee and manage the initial public offer process. The underwriting team is responsible for performing some of the most important IPO steps, including:

•   Preparing IPO documentation

•   Conducting necessary due diligence

•   Preparing marketing materials for distribution to investors

•   Overseeing the sale of company stock through the IPO

The investment banks serving as underwriters can also help with determining the appropriate valuation of a business as part of the IPO process.

Securities and Exchange Commission (SEC)

Companies must register with the SEC before launching an initial public offering. The SEC must review and accept all documentation the company submits in reference to the IPO prior to shares being sold to the public.

Attorneys and Accountants

Attorneys and accountants work alongside underwriters during the initial public offer process to prepare the required documentation. Legal counsel may draft documents and manage the SEC filing, while accountants may prepare the financial statements that accompany the SEC registration paperwork.

Stock Exchange

Going public with an IPO means choosing an exchange through which traders can buy and sell stock. In the United States, this typically means the New York Stock Exchange (NYSE) or the Nasdaq.

Recommended: What Are the Different Stock Exchanges?

Investors

These include both those who put money into the company prior to its going public, such as venture capitalists, and those who anticipate trading shares once the IPO launches.

Both institutional investors, such as hedge funds or mutual funds, and individual retail investors who are interested in owning shares, may participate in an IPO.

Buying IPO shares may seem desirable, and there has been a lot of hype in the media about IPO stock. But it’s important to remember that IPO stocks are typically high risk, and investors can also lose money. That’s why many brokerages require that investors meet certain standards in order to be qualified to trade IPO shares.

The Takeaway

The process of taking a company public can be exciting, but it’s also a rigorous transition that requires a fledgling company to meet a series of criteria and pass through several stages before actually making its debut on a public exchange.

This process helps to ensure that the company has sound fundamentals, and is ready for public shareholder investment. Investing in IPOs has gotten a reputation as a way to make money quickly; it’s also a way investors can rapidly lose their investment, as IPOs are traditionally volatile. In addition, not all investors may qualify to trade IPO shares; check with your brokerage.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/TimArbaev

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Sep
11
2023
IPO Book Building Process Explained

IPO Book-Building Process Explained

By | Growing Wealth, invest, Investing | Comments Off on IPO Book-Building Process Explained

Initial public offering (IPO) book building can help with efficient price discovery for companies looking to IPO. After the IPO, when shares are available for trading in the secondary market, book building may also be used to price secondary equity offerings.

With book building, the investment bank that underwrites an IPO reaches out to institutional investors to gauge their interest in buying shares of a company looking to go public. The underwriter asks those interested to submit bids detailing the number of shares they seek to own and at what price they would be willing to pay.

The process of book building has become more common than the fixed-pricing method, which may not yield the most accurate results.

Recommended: Why Do Companies Go Public?

Key Points

•   Book building is the preferred method by which a company prices IPO shares.

•   There are five key steps in the IPO book building process: find a banker, collect bids, determine a price, disclose details, and allotment.

•   Partial book building is restricted to institutional investors, while accelerated book building is used for large equity offerings to raise capital in a short period.

•   The risk of an IPO being underpriced or overpriced when shares go public can lead to volatility, making IPO investing a high-risk endeavor.

•   The goal of book building is to make sure proper market-based price discovery to help the issuing company set a fair share price.

What Is Book Building?

Book building is the preferred method by which a company prices IPO shares.

Among the first steps of the IPO process is for the private company to hire an investment bank to lead the underwriting effort. IPO book building happens when the IPO underwriter gathers interest from institutional investors, such as fund managers and other large investors, to determine the value of the private company’s shares.

As part of the IPO and book-building process, the investment bank must promote the company and the offering to stir up interest before they can determine share price.

This is often called an IPO roadshow. If the underwriter finds that there is sufficient interest based on responses from the investor community, then the bank will determine an offering price to the issuer.

Book building is recommended by all the major stock exchanges, and is common practice in most developed countries. It has become more popular than the fixed-pricing method, which involves setting an IPO price before measuring investor interest. Book building, on the other hand, generates and records investor interest to land on an IPO price.

Thus book building helps find a fair share price for a private company based on market interest. When a bank gauges market interest, a floor price is sometimes used, and bids arrive at or above that floor price. The stock price is determined after the bid closing date. With the book building method, demand can be seen in real-time as the book is being built.


💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

[ipo_launch]

Book-Building Process

Firms going public want to sell their stock at the highest possible price without deterring the investment community. There are five key steps the issuing company must perform in the process of IPO book building in order to discover a market-based share price.

1.    Find a Banker: The issuing company hires an investment bank to underwrite the transaction. The underwriter advises the company, guiding it through the lengthy book-building process. The investment bank also commits to buying all the shares from the issuer, carrying all the risk. The bank will then resell the shares to investors.

2.    Collect Bids: The investment bank invites investors to submit bids on the number of shares they are interested in and at what price. This solicitation and the preliminary bids give the bankers and the company’s management an indication of the market’s interest for the shares. Roadshows are often used to grow investor appetite.

3.    Determine a Price: The book is built by aggregating demand as the bids arrive. The bank uses a weighted average to determine a final cutoff price based on indications of interest. This step helps with pricing an IPO.

4.    Disclosure: The underwriter must disclose details of the bids to the public.

5.    Allotment: Accepted bidders are allotted shares.

Even if the IPO book-building process goes smoothly and a price is set, it does not ensure that actual transactions will take place at that price once the IPO is open to buyers. Book building simply helps to gauge demand and determines a fair market-based price. But substantial risks remain for interested investors, who could see steep losses if the share price drops after the IPO.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

What Is Partial Book Building?

Partial book building is another form of the IPO book-building process that happens only at the institutional level, rather than the retail level.

With partial book building, a select group of investors is approached regarding their interest in the IPO. Using their bids, a weighted average price is calculated and a cutoff price is determined. That cutoff price is then used as the public offering price to retail investors as a fixed price. The cost of the partial book-building IPO process is often lower due to its relative efficiency.

What Is Accelerated Book Building?

Accelerated book building is used for large equity offerings to raise capital in a short period of time. The investment bank is tasked with book building, determining a cutoff price, and allocating shares within 48 hours or less. No roadshow is involved.

The accelerated book-building process is used when a company needs immediate financing and raising capital from debt is off the table. It is typically done when a firm seeks to acquire another company.

Accelerated book building is often conducted overnight, with the issuing company asking investment banks to serve as underwriters before the next day’s placement.

What Effect Does Book Building Have On IPO Prices?

A good IPO book-building process helps ensure proper market-based price discovery. Still, there is the risk that an IPO can be underpriced or overpriced when shares finally go public. This can lead to volatility, which IPO investors also need to be aware of. This is one reason why IPOs are considered high-risk endeavors.

Underpricing, the main risk to the issuer, happens when the offering price is materially below the share price on the first day of trading. With an underpriced IPO, a company is said to have left money on the table, while an overpriced IPO can have negative implications on the future price of a stock due to poor investor sentiment. Investors can buy IPO stock on Day One of trading in the secondary market, while qualified investors can purchase IPO shares before they begin trading in the open market.

While there is no surefire way to guarantee a good IPO price, the book-building IPO method offers quality pre-market price discovery customized to the issuer. It also reduces the risk for the underwriter. It can have high costs, however, and there is the risk that the IPO will end up being underpriced. The overall goal is to see a good and steady stock performance during and after the IPO.

The Takeaway

The book-building IPO process involves critical steps to ensure a stock goes public promptly with as few hiccups as possible.

There are different types of IPO book building, and the way an investment bank performs the process can impact IPO prices. The goal is for efficient price discovery on shares of the company looking to go public. Book building can also be used for secondary equity offerings.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What are the steps in book building?

There are 5 main steps in the book-building IPO process:

1.    The issuing company hires an investment bank to underwrite the offering. The bank determines a share price value range and writes a prospectus to send to potential institutional investors.

2.    The underwriting bank invites institutional investors to submit bids on how many shares they want to buy and at what price.

3.    The book is built by sorting and summing demand for the shares to calculate a final IPO price. It’s known as the cutoff price.

4.    The investment bank is required to disclose the details of submitted bids to the public.

5.    Shares are allocated to accepted bidders.

What is 100% book building?

100% book building is a process in which 100% of the offering is done on a firm basis or is reserved for promoters and permanent employees of the issuing company.

Photo credit: iStock/PeopleImages

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Sep
11
2023
Ultimate Guide to Hot Issue IPOs

Hot Issues (IPOs): What You Need to Know

By | Growing Wealth, invest, Investing | Comments Off on Hot Issues (IPOs): What You Need to Know

A hot issue IPO refers to an initial public offering (IPO) that has generated large-scale public interest. A hot issue is usually accompanied by high volatility, investor excitement, and price run-ups on the first few days of trading.

Hot issues are often talked about in the media for weeks, if not months, in advance of the actual IPO. The resulting excitement attracts all types of investors, ranging from long-term investors, who believe in the potential of the firm, to short-term speculators who want to flip the shares for quick profits.

This can easily lead to wide swings in value that can result in big gains for some and substantial losses for unsuspecting investors.

Key Points

•   A hot issue IPO is an initial public offering that’s generated large-scale public interest.

•   High volatility, investor excitement, and price run-ups usually accompany hot issues on the first few days of trading.

•   A hot issue starts like an ordinary IPO, with the company filing a form S-1 with the SEC and holding an investor roadshow.

•   High trading volume on hot issues can result in extreme volatility and an initial spike in prices.

•   Investors should be careful when considering hot issues and wait for the volatility to subside before investing.

What Is a Hot Issue?

A hot issue is any IPO that generates high demand among investors. Hot issues tend to occur more frequently among hot new tech companies, during economic expansions, when investors are on the prowl for the next “disruptor.”

Investor excitement for hot issue IPOs can be generated during the investor roadshow, or enhanced by media coverage in the months leading up to the IPO date.

Hot issues are characterized by extreme price volatility during the first days of trading. New investors should be cautious when considering hot issues, as large price run-ups may or may not be reflective of the firm’s actual fundamentals. And, as experienced investors know, all the hype in the world still can’t predict the performance of any stock.

💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

[ipo_launch]

How a Hot Issue Works

A hot issue starts off like an ordinary IPO, or initial public offering. The company that wishes to initiate an IPO process contracts with an underwriter, or team of underwriters (underwriting syndicate), to take stock of its existing business and market its shares to the public.

The company starts by filing a form S-1, which registers the firm’s new shares with the Securities and Exchange Commission (SEC) and is required for all new domestic issuers who wish to offer shares for sale to the public.

The issuing company and its underwriters will then embark on an investor roadshow which usually takes place over several months. During this process, they will meet with and present to various institutional investors across the country.

Roadshows are intended to market the shares and generate additional enthusiasm for buying the IPO stock. These occur well in advance of the actual pricing date and are another opportunity to introduce the firm and its management to the public.

Recommended: What Is an IPO Underwriter?

Pricing Hot Issue Shares

Once the new issue is ready to price, the underwriters will size the issue and price the shares at a level that they think will generate high demand for the shares.

Generally there will be a limited number of shares available to trade for new issues, as the actual number of shares issued will be sized around the new firm’s corporate financing needs — raising capital being the primary reason companies go public.

Limiting the supply of shares can drum up excitement for the stock, however most issuers typically have shares in reserve in case the IPO ends up being significantly oversubscribed.

The IPO underwriters then take pre-orders for the stock and resize/reprice the issue based on the investor interest. Once the shares are sold, they are transferred to institutional investor accounts, based on the allocations made through their order book.

The institutional investors typically turn around and flip the IPO shares on the market for large profits, but in some instances may hold onto the new shares, depending on their needs.


💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

High Trading-Volume Impact

High trading volume on hot issues result in high volatility and often an initial spike in prices during the first few trading days, particularly if the shares were multiple times oversubscribed.

If the share price spikes quickly on the first day and falls off in the following days or weeks, this could signal an artificially low IPO price or high speculator demand.

Due to the initial feeding frenzy around hot issue IPOs, they’re popular targets for speculators who wish to flip shares for a quick profit, often within the same day.

If long-term investors are interested in a particular hot issue, it may be prudent for them to step back and wait for the volatility to subside before initiating their own position, particularly in times of high market volatility.

The Takeaway

While it’s easy to get drawn into the excitement surrounding a hot issue IPO, investors should be careful in the first few days of trading, as initial volatility may lead to large losses.

It sometimes pays to wait a few days, or even weeks, for the initial trading volume to subside and for share prices to settle at stable levels.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is a hot issue stock?

A hot issue stock is a new initial public offering that has garnered widespread attention among the investing public.

Hot issue stocks are typically characterized by being oversubscribed and typically trade at a significant premium above the offering price once shares hit the aftermarket.

What is an issue in an IPO?

An issue in an IPO is when a private firm goes public for the first time via the initial public offering process. This involves offering its shares for sale to the investing public.

What are hot shares?

Hot shares can be any stock that is highly in demand with investors. These usually involve new issue stocks that have run-up in price, but can involve any stock that has seen heavy bullish price action.

Photo credit: iStock/Yasuko Inoue

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN0623090

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Sep
11
2023
IPO Pop & IPO Trends

What Is an IPO Pop?

By | Growing Wealth, invest, Investing | Comments Off on What Is an IPO Pop?

An IPO pop occurs after a company goes public, when its stock price jumps higher on the first day of trading.

No matter how much preparation they’ve done, company executives and shareholders never really know how a stock will perform once it hits the market through its initial public offering (IPO).

While they of course hope to see some increase in price, a big spike — or IPO pop — could indicate that the underwriters underpriced the IPO.

Key Points

•   An IPO pop occurs when a company’s stock spikes on its first day of trading and may indicate that underwriters didn’t properly price retail investor demand into the IPO price.

•   In 2021, IPOs saw increases of 40% on average on the first trading day, but in the second quarter, companies were pricing below their expected ranges.

•   Direct listings are an alternative to IPOs that may help avoid an IPO pop, but they aren’t as efficient at raising capital.

•   Buying IPO stocks can be profitable, but it’s important to research the company before investing and to consider broad market trends.

•   IPO pops are relatively common, and larger companies tend to have larger pops since they are in high demand.

IPO Pop Defined

An IPO pop occurs when a company’s stock spikes on its first day of trading. An IPO pop may be a sign that underwriters did not properly price retail investor demand into the IPO price.

For instance, if a company prices its shares at $47 in its IPO and the price goes to $48 or $50, that would be considered a normal and positive IPO increase. But if the stock jumped to $60, both the company and its early investors might believe an error occurred in the IPO pricing.

This is one of the reasons that IPO shares are considered highly risky. In many cases, historically, that initial price jump hasn’t lasted, and investors who bought on the way up have taken a hit on the way down.

Recommended: What Is an IPO?

[ipo_launch]

Problems Indicated by an IPO Pop

Many different factors go into pricing an IPO, including revenue, private investment amounts, public and institutional interest in investing. IPO underwriters try to find a share price that institutional investors will buy.

If the public thinks a company’s shares are more valuable than what early investors, underwriters, and executives thought, that means the company could have raised more money, increasing their own profit. Or they could have raised the same amount of money but with less dilution.

Also, when bankers price an IPO too low, that means their customers benefit — while company founders and VCs miss out on more profits.

If the share price soars on the first day, some investors will be happy, but it means the company could have raised more money if they had priced the stock higher from the start. It also means that existing investors could have given up a smaller percentage of their ownership for the same price.


💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

IPO Trends

In the past, some companies have seen significant IPO pops occur on their first trading day. But in many cases the market cooled down after the first quarter, with some high-profile companies seeing declines on their first day.

Take 2021 as an example; in that year there were a record number of IPOs in the market.

In the first quarter of 2021 many companies were pricing their IPOs at the top of their expected range, due to increased demand, an improving economy, and a strong stock market. Even after that, IPOs still saw increases of 40% on average on the first trading day.

But in the second quarter, companies were pricing below their expected ranges and some weren’t even reaching those prices on the first trading day. This made the public less eager to buy into IPOs. This type of volatility is common to IPOs, and another reason why investors should be cautious when investing in them.

There was also a boom in special-purpose acquisition corporations (SPACs), IPOs of shell companies that go public with the sole purpose of acquiring other companies.


💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

Direct Listings

Some companies have turned to direct listings as a way to try to avoid an IPO pop. In a direct listing, the company doesn’t have an IPO, they just list their stock and it starts trading in the market. There is a reference price set by a market maker for the stock in a direct listing, but it isn’t nearly as important as the price of a stock in an IPO. Although this can help avoid an IPO pop, it is not as efficient as an IPO as a means of raising capital.

Setting a price for an IPO is a key part of that fundraising strategy. A newer strategy companies are trying is raising a large amount of private capital just before going public, and then doing a direct listing instead of an IPO. The process gives a valuation to the stock price but in a different way from pricing shares for an IPO.

A third strategy is to direct list, and then do a fundraising round some time after the listing, giving the public a chance to establish the market price for the stock.

Do IPOs Usually Go Up or Down?

Although stocks increase an average of 18.4% on their first day of trading, 31% of IPOs decrease when they start to trade. Calculations of IPO profits show that almost 50% of IPOs decrease from their day-one trading price on their second day of trading. While IPO investing may seem like a great investment opportunity, IPOs remain a risky and unpredictable asset class.

Average IPO First Day Return

IPO pops are relatively common. Sometimes average first day returns increase significantly, such as during the dot-com bubble when the average pop was 60%. Larger companies generally have larger pops, since they are in high demand.

Determining the Right IPOs to Invest In

Buying IPO stocks can be profitable, but it also has risks. Just because a company is well known or there is a lot of publicity around its IPO doesn’t mean the IPO will be profitable. As with any investment, it’s important to research the market and each company before deciding to invest.

It’s also important to be patient and flexible, as individual investors don’t always have the ability to trade IPO shares. Or investors may have access at some point after the actual IPO. In addition, IPO shares can be limited.

If you’re interested in upcoming IPOs, it’s important to keep in mind that IPOs increase in price on the first day but quickly decrease again, and almost a third of IPOs decrease on their first listing day. Popular IPOs are more likely to increase, but they are also crowded with investors, so investors might not see their orders fulfilled.

When investing in IPOs through your brokerage account, it’s important to look at broad market trends in addition to individual company fundamentals. When the market is strong, IPOs tend to perform better. Also, when high-profile companies have unsuccessful IPOs, investors may become more wary about investing in upcoming IPOs.

Each sector has different trends and averages. Generally tech companies have higher first day returns than other types of companies, even though they’re also often unprofitable. Investors still want in on these IPOs because they may have strong future earnings potential.

Historically, some of the most successful tech stocks started out with negative earnings, so low earnings are not a strong indicator of future success or failure.

The Takeaway

As exciting as an IPO pop can be, it’s another example of how hard it is for individual investors to time the market. First, there’s no way to predict if a newly minted stock will have a spike after the IPO. Sometimes there is a pop and then the price plunges. This is one reason why IPOs are considered high-risk events.

Investors who find IPOs compelling may want to assess company fundamentals and other market conditions before investing in IPO stock.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Invest with as little as $5 with a SoFi Active Investing account.

Photo credit: iStock/Olemedia

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN0623070

Read more
Sep
10
2023
Why Invest in Bankrupt Companies?

Why Invest in Bankrupt Companies?

By | Financial Independence, Growing Wealth, invest, Investing | Comments Off on Why Invest in Bankrupt Companies?

Investors put their cash in the market in order to make more money, not lose it. So it can be befuddling, then, that some people are interested in bankruptcy investing—or, buying stock in Chapter 11 (bankrupt) companies.

While bankruptcy investing is a type of investment that may appeal to some, it’s a high-risk strategy that may not be the best route for most investors. Read on to learn about bankruptcy investing, and why investors might be interested in buying stock in Chapter 11 companies.

Different Types of Bankruptcy

Bankruptcy is a complex, legal process that companies, municipalities, and individuals undergo when they’re unable to pay their debts. It’s important to know that just because a company declares bankruptcy doesn’t mean that it’s no longer an operating business.

There are six different types of bankruptcy, known as chapters, with Chapters 7 and 11 applying to businesses.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy means that a company is ceasing operations and liquidating its assets. If a company declares Chapter 7 bankruptcy, assets are sold off for cash, and used to pay off its debts in an order determined by bankruptcy laws. Often investment bankers head the valuation process and help companies sell various assets during the bankruptcy process.

Then, bondholders and investors get their share of any assets left. When all is said and done, the company will no longer exist, and any assets it had will have new owners.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy, or “reorganization,” is different from Chapter 7. Companies often file for Chapter 11 bankruptcy as a defensive move when their debt payments become untenable.

Under Chapter 11 protections, companies focus on restructuring and getting their debt under control, increasing revenues, and cutting costs. During the bankruptcy reorganization, companies can often renegotiate interest rates or eliminate some debt payments entirely.

These companies are basically calling a time-out so that they can revise their gameplan. Companies often keep operating under Chapter 11 bankruptcy. Ultimately, the goal is to use Chapter 11 protections to buy some time, put together a plan to emerge from bankruptcy, and return to profitability.

What Happens To Stock When A Company Goes Bankrupt?

Under Chapter 7 bankruptcy, investors’ shares are effectively dead, since the company is going out of business.

If a company files for Chapter 11 bankruptcy protection, a few things could happen. Shares could continue trading as normal, with little or no effect (other than price fluctuations) for investors. The stock may get delisted from major stock exchanges, but can still be traded over-the-counter (OTC). But be aware: The company may also cancel shares, making some investors’ holdings worthless.

Why Invest in a Bankrupt Company?


A company declaring bankruptcy sends a pretty clear message to investors that it’s in trouble, which can cause share prices to fall. For some investors, falling prices present an opportunity to buy—an attractive one, especially if they believe that those companies will return to profitability in the future.

At its core, bankruptcy investing is all about perceived opportunity. Many large companies with recognizable names have declared bankruptcy in recent years (examples include GNC, Hertz, Gold’s Gym, JCPenney, and Pier 1 Imports), and buying big-name stocks at rock-bottom prices can be very appetizing to investors.

There’s a chance that these companies can and will emerge from bankruptcy with streamlined operations that can quickly start driving revenue, causing share prices to increase in value. But it’s also possible that a bankrupt company is too far gone, and won’t be able to return to profitability. Investing in bankrupt companies is speculative and risky, but the potential of big rewards is enticing to some investors.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Research to Do Before Investing in Bankrupt Companies

When investing in any stock (not just bankruptcy companies), it’s important to do your research, or due diligence on the company. For many investors, that means doing more than just looking at the price fluctuations over the past few days—it involves digging into the nitty-gritty details. Often, those processes can include fundamental and technical analyses.

Fundamental analysis of stocks involves taking a look at, well, the fundamentals of a company. That could include evaluating a company’s profits and growth, or metrics like earnings per share or cash flow. Investors are generally looking for strong companies to invest in, and generally, analyzing a company’s performance will give a sense as to whether or not it’s worth investing in.

Stock technical analysis, on the other hand, is a little more…technical. It involves looking at a stock’s patterns and trends in order to try and predict what it will do next. Essentially, it’s a method of forecasting a stock’s future performance based on its historical performance.

Recommended: 5 Ways to Analyze A Stock

Of course, if a company is bankrupt, both fundamental and technical analyses will likely provide some less-than-inspiring data, such as an unsustainably high leverage ratio. These companies have gone bankrupt, after all—so, investing in a bankrupt company will also require a leap of faith and research into their industry and their plan to return to profitability.

The Takeaway

Investing in bankrupt companies is a risky endeavor. While it may hold the potential for rewards for those who do their research and are willing to take the risk, it may not be the best choice for most investors.

There are many other ways to invest for those who are looking for a less risky, more sustainable, long-term investment strategy.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

Photo credit: iStock/Rocco-Herrmann

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN0723007

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