MoneyHL Archives

Sep

2025

What Is Volume in Stock Trading? How Investors Can Use It

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is Volume in Stocks?
What Does Stock Volume Tell You?
Where Can You Find Stock Volume on a Chart?
How Traders Can Use Volume
Types of Indicators to Measure Stock Volume
FAQ

In stock trading, volume refers to the number of shares traded in a specific time period. When demand is high and the number of shares traded goes up, the volume goes up. Similarly, when sales are down, that stock’s trading volume drops.

Some investors may analyze volume as a part of a technical analysis strategy to help them make decisions about when to buy and sell a particular stock. Here’s a closer look at volume and how investors may be able to use it.

Key Points

• Stock trading volume is the number of shares traded in a specific time period.

• High trading volume can indicate strong interest in a stock, and high liquidity.

• Low trading volume can signal less enthusiasm, market uncertainty, or lower liquidity.

• Analyzing volume helps investors understand the strength of price trends and potential reversals.

• Various technical indicators, like On Balance Volume (OBV) and Volume Price Trend (VPT), use trading volume to aid investment decisions.

What Is Volume in Stocks?

Trade volume for stock and other securities tells investors how frequently shares in a company are being bought and sold.

Every buy and sell transaction of a particular stock helps contribute to its trade volume. A transaction takes place when a buyer agrees to purchase the shares a seller has put up for sale. If this type of transaction takes place 100 times during a day for a particular stock, that stock has a trade volume of 100.

For stock futures and options trading, volume is based on how many contracts change hands during the set period.

Volume doesn’t tell the whole story of a stock. There are a couple of terms that can help give investors a better idea of the size of a company and how many shares are actually available, including “float” and market capitalization, or market cap.

Volume vs Float

While volume is the number of shares that are being actively traded during a given period, float is the number of shares that are actually available to trade. This total does not include restricted shares, which are not registered and are usually given to corporate leaders as part of a compensation package. Outstanding shares refers to all of the stock a company has issued, including restricted shares.

Stocks that have a small number of shares — usually between 10 million and 20 million — available to trade are what is known as “low-float” stocks. Large corporations, by contrast, could have floats of billions of shares.

In certain circumstances when trade volume is very high, volume can surpass float or even number of outstanding shares.

Volume vs Market Cap

Market cap is the total number of outstanding shares multiplied by the current public market price. In other words, it’s the dollar amount required to buy up all outstanding shares of a company, including restricted shares.

Market cap helps investors understand the size of one company relative to another. For example, large-cap stocks tend to be companies worth $10 billion to $200 billion, while small-cap stocks tend to be companies worth $250 million to $2 billion.

Investors can calculate free-float market cap by excluding restricted shares.

What Does Stock Volume Tell You?

Stock volume tells investors how much demand there is for a stock. The greater the volume, the more demand there is, while smaller volume translates to lower demand

High trade volume can also indicate that stock orders are being executed quickly and that the market is highly liquid. In other words, high volume can mean that buying and selling the stock is relatively easy.

What It Means When Stock Volume Goes Up

When stock volume is on the rise, it typically means that prices are on the move, either in the upward or downward direction. As volume increases, it can mean that investors are committing to the price change; a trend may be gathering strength.

Generally speaking, higher volume means that there’s increased interest in buying a stock, and that the market for that stock is more liquid, making it easier to buy and sell shares.

What It Means When Stock Volume Goes Down

When stock volume starts to decrease, it can signal that investors are less enthusiastic about a company. Volumes can decrease even as stock prices increase.

Low volume can be a signal for investors to be cautious about a stock. It can signal market uncertainty, the possibility of stock volatility on the horizon, and lower liquidity.

Recommended: Stock Market Basics

Where Can You Find Stock Volume on a Chart?

Investors can usually find information about volume next to or below the stock chart provided by trading platforms or media sources, like Yahoo Finance or the Wall Street Journal.

Often, volume is tracked using a candlestick chart, in which investors look for patterns to help make investment decisions. Normally, candlestick charts measure a stock’s price, including highs, lows, and opening and closing prices over a given period.

The resulting figure looks a bit like a candle with a line, or “wick,” that represents highs and lows and a rectangle that marks opening and closing prices. Volume candlestick charts use the width of the rectangle to indicate volume. The higher the volume, the wider the candle.

How Traders Can Use Volume

We’ve already seen that volume can help investors understand when a price trend is picking up steam. There are a few other basic guidelines investors may want to consider as they’re deciding when to buy and sell stocks.

Exhaustion Moves

Exhaustion moves occur when there is a sharp movement in the price of stock coupled with a sharp increase in trading volume. This potentially signals the end of a current price trend. These moments can be accompanied by a period of volatility.

Price Reversals

If the price of a stock has moved in one direction for a long time and volume begins to increase at the same time that prices start to move very little, it can signal a reversal. So if stock prices were on an upward trajectory, changes start to slow and volume increases, it might mean the trend is about to reverse.

Breakouts

A breakout is a point at which changes in market trends occur. Changes in volume can clue investors into the strength of the breakout. Little change in volume suggests investors are paying the breakout little heed, while big changes in volume indicate a strong new trend.

Bullish Signals

Volume can also help investors identify bullish signs that suggest prices are likely to rise. For example, say stock prices increase and then decline. At the same time there is an increase in volume which drives prices up again. The stock again declines, but if it doesn’t decline the second time as much as it did the first time, it may be a bullish signal that prices will continue to rise.

Types of Indicators to Measure Stock Volume

There are a number of volume indicators that could help traders make investment decisions based on their approach and goals. Here are a few examples.

On Balance Volume (OBV)

On balance volume (OBV) is a cumulative technical indicator in which volume is added on days when overall volume is up and subtracted on days when overall volume is down. The direction of the indicator is what is most important to investors. When price and OBV are moving up or down together, it is likely the trend will increase in strength.

Volume Price Trend (VPT)

Similar to OBV, volume price trend measures cumulative volume. However, it differs in that it considers a percentage increase or decrease in price. VPT helps investors relate share price to trading volume. If the price of a stock increases, so does the value of the indicator. If prices fall, the indicator value falls, too.

Ease of Movement

This indicator helps traders see how easy it is for a stock price to move between levels based on trading volumes. Stocks that continue along a trend for a given period are considered “easy.” This indicator is used over longer time periods and in volatile markets in which it can be hard to spot trends.

The Takeaway

Stock trading volume measures the amount of shares traded in a given day or time period. Trading volume can also apply to other types of securities and derivatives, where contracts are traded. Examining volume and other tools in technical analysis can help investors make decisions about when to buy and sell stocks.

When buying any individual security, investors should be sure to consider how it fits into their overall financial plan, including their goals, risk tolerance, and time horizon.

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FAQ

Is high trading volume good?

High trading volume indicates an uptrend in a stock’s shares being traded, which is often a sign of investor interest. This may lead to higher prices, but trading volume is only one indicator that investors should consider when buying and selling stocks or other securities.

Can trading volume rise, but prices fall?

Yes. If trading volume is high, but prices are dropping, that could indicate that there is downward pressure on that stock price — or it could be a bullish signal, that there might be a price reversal. Again, it’s wise to use more than one indicator to assess price trends.

What does low trading volume mean?

Low trading volume often indicates a lack of liquidity, which means that it can be harder to buy and sell shares. Low volume also indicates a lack of interest or demand for the stock.

Photo credit: iStock/shapecharge

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-103

Sep

2025

What Is IPO Due Diligence?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Table of Contents

IPO Due Diligence Process
Objective of IPO Due Diligence
Benefits of Due Diligence Process
Next Steps in Filing an IPO
FAQ

As part of the IPO process, private companies must perform due diligence to ensure that they’ve met all the requirements for being listed on a public exchange. This ensures that the company follows all registration and disclosure guidelines established by the Securities Act of 1933.

Broadly speaking, IPO due diligence is similar to the due diligence performed in other situations involving large amounts of capital. Just as an investor may research certain aspects of a company before deciding to purchase shares, a company that’s planning an IPO must have an understanding of the various factors that could positively or negatively affect its success.

If you’re interested in IPOs, it’s helpful to know what goes on behind the scenes and how the IPO due diligence process works, given that IPO stocks are considered high-risk securities.

Key Points

• IPO due diligence is a process of researching a private company to make sure it meets the requirements for being listed on a public exchange.

• The due diligence process involves gathering information about the company’s organizational structure, licensing and taxes, board and employee information, financial information, customer/service information, and company property.

• Benefits of IPO due diligence include an opportunity to explore the viability of an IPO for the company and more information for investors on the company and its risks.

• Steps to filing an IPO include SEC review, IPO roadshow, pricing, launch, stabilization, and transition to market.

• Due diligence can help inform investors whether the company complies with all relevant SEC regulations.

IPO Due Diligence Process

During the IPO due diligence process, the IPO underwriters and IPO attorneys will work together to perform the necessary background research to gain a better understanding of the company, its management, and its financials. This involves gathering the following information:

1. Organizational Data

During the first stage of the IPO due diligence process, the underwriters and attorneys gather information about the company’s organizational structure. This may include requesting copies of any or all of the following:

• Articles of incorporation

• A list of the company’s shareholders and committees

• An overview of the number of shares owned per individual shareholder

• Annual business reports for the previous three years

• Company business plans or strategic plans

• A breakdown of the company’s organizational structure, including board members, directors, and employees

The underwriting team may also request a copy of a certificate in good standing from the state’s Secretary of State, along with information on organizational decision-making.

💡 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.

2. Licensing and Taxation

The next step in IPO due diligence involves collecting information about the company’s licensing and taxes. At this stage, the IPO underwriter and/or attorneys may request copies of:

• All business licenses currently issued to the company

• Annual tax returns

• Government licenses and permits held by the company

• Employment tax filings

• Comprehensive reports of the company’s tax filing data

The underwriting team may look back three years or more when analyzing income tax returns and tax filing information.

Recommended: The IPO Process

3. Board and Employee Information

Due diligence can also extend to information about the company’s board of directors, its managers, and its employees. At this phase of IPO due diligence, underwriters and attorney may request:

• A list of all individuals it employees

• Information about employee status, including each employee’s position and salary

• Details regarding employee benefits and bonuses, according to position

• A copy of company policies relating to sick leave or conflict resolution

• Details about employee insurance benefits, including health, disability and life insurance

• Copies of resumes for leading personnel

• Copies of employee audits

With regard to employee audits, underwriters may look back two to three years.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

4. Financial Information

A company’s finances can come under close scrutiny during the IPO due diligence process. When considering financial information, the IPO underwriting and legal team may review:

• Copies of broker or investment banking arrangements

• Company financial statements records, including previous financial audits

• A list of all financial accounts held by the company

• Copies of financial analyst reports

• Information about the company’s inventory holdings

• Details regarding the company’s accounting and amortization methods

• A list of all fixed and variable expenses

The timeframe for which underwriters can review financial information can stretch from the previous three to five years, depending on what they’re examining.

Recommended: How to Read Financial Statements

5. Customer/Service Information

Due diligence also takes into account interactions with customers and service practices. During this step, the underwriting team may request:

• Reports or information about the products and services offered by the company

• Details about consumer complaints filed against the company

• Information about legal approvals for the company’s products and services

• Copies of the company’s trading policies

• Details regarding the company’s marketing strategies as well as copies of marketing materials

The underwriters may also need to see copies of customer supply or service agreements.

6. Company Property

Last but not least, IPO underwriters will examine property holdings owned by the company. This can include reviewing information about:

• Business locations

• Real estate agreements and/or franchise licenses

• Trademarks and copyrights held by the company

• Approved patents held by the company

• Trademark complaints, if applicable

• Official contracts showing the purchase of real estate

The underwriters may also ask for a full inventory of any physical or real property the company owns.

Objective of IPO Due Diligence

During due diligence, the underwriting team is working to gain a full understanding of how the company operates, how it’s structured, how healthy it is financially, and whether there are any potential issues that could be a roadblock to going public. The due diligence process effectively clears the way for the next steps in the IPO process.

The IPO due diligence process ensures that there are no surprises waiting to crop up that could derail a company’s progress. It’s also an opportunity for the underwriting team, the IPO attorneys, and the company itself to assess any potential risk factors that may affect the IPO’s outcome.

Benefits of Due Diligence Process

IPO due diligence has benefits for both the company and investors.

IPO Due Diligence Benefits for the Company

• Due diligence offers an opportunity to explore the viability of an IPO, based on the company’s business model, financials, capital needs, and anticipated demand for its shares.

• Due diligence also allows the company to avoid going afoul of regulatory guidelines, and it can help to identify any issues the company may need to address before going public.

IPO Due Diligence Benefits to Investors

• The due diligence process can reveal more about a company than the information in the initial red herring prospectus. In IPO investing, a red herring refers to the initial prospectus compiled for SEC registration purposes.

• If investors feel confident about the information they have, that could help to fuel the success of the IPO which could mean more capital raised for the company and better returns for those who purchase its shares.

Note that an investor’s eligibility or suitability for trading IPO shares is usually determined by their brokerage firm.

Next Steps in Filing an IPO

Once the underwriting team has completed its due diligence, the company can move on to the next steps involved in how to file an Initial Public Offering (IPO). Again, that includes:

• SEC review

• IPO roadshow

• Pricing

• Launch

• Stabilization

• Transition to market

The SEC review typically takes between 90 and 150 days to complete. At this point, it’s up to the SEC to determine that all regulatory requirements have been met. Usually, the team conducting the review includes one or more attorneys and one or more accountants.

Next, comes the roadshow. During the roadshow, the company presents details about the IPO to potential investors. This step of the IPO process allows the company and underwriters to gauge interest in the offering and attract investors.

IPO pricing usually involves a closer look at the company’s financials, including its valuation and cash flow. Underwriters may also consider valuations for similar competitors when determining the appropriate IPO price.

After setting the IPO price, the underwriters and the company will schedule the IPO launch. Once the IPO launches, investors can purchase shares of the company. The underwriter can take action to stabilize the IPO price for a period of time following the launch. After that, the company transitions to market competition, concluding the IPO process.

The Takeaway

IPO due diligence is an important part of the IPO process. Due diligence ensures that a company about to go public complies with all relevant SEC regulations. Then, it’s up to qualified individual investors to decide whether trading IPO shares suits their goals and risk tolerance.

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 due diligence for an IPO?

Due diligence for an IPO refers to the process of investigating a private company’s financial, legal, operational, and regulatory status to make sure that it meets public listing requirements. Due diligence can also identify any potential risks or problems that could affect the company’s IPO. The goal of due diligence is to verify that the company is ready to go public.

What is IPO compliance?

IPO compliance refers to a company’s compliance with regulatory requirements in order to proceed with an initial public offering. Compliance helps ensure that a company meets financial reporting, adheres to strong governance, and has strong internal controls as required by the Sarbanes-Oxley Act, which was passed in 2002 to help protect investors from corporate fraud.

What are the types of IPO due diligence?

The main types of IPO due diligence include financial, legal, commercial, and operational due diligence. During the due diligence process, IPO underwriters and attorneys will also look at a company’s licensing, tax obligations and history, and board of directors and employees, among other factors. The purpose of due diligence is to verify information in all areas to identify and assess any risks and ensure the company’s readiness for going public.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/porcorex

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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. This should not be considered a recommendation to participate in IPOs 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 more information on the allocation process please visit IPO Allocation Procedures.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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.

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOIN-Q325-077

Sep

2025

What Is IPO Subscription Status?

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

Table of Contents

IPO Review
IPO Subscription Status Defined
Why IPO Subscription Status Matters
FAQ

An IPO subscription status describes the position of a company’s initial public offering (or IPO), as it relates to how many committed investors it has prior to the actual IPO.

For example, an IPO may be “fully subscribed,” “undersubscribed,” or “oversubscribed.”

Many investors are intrigued by IPOs, because it’s an opportunity to put money into a relatively early-stage company that has room to grow over time. Some companies draw more investor interest than others, and the IPO’s subscription status is one way to gauge that, because investors sign up with the intent to purchase a certain number of shares.

A company’s IPO subscription status doesn’t guarantee that the stock will perform one way or another. It’s just a preliminary indicator that may help interested investors navigate a potentially risky investment move.

Key Points

• An IPO subscription status describes the position of a company’s initial public offering (IPO) with respect to how many committed investors it has before the actual IPO.

• An IPO is when a company offers shares for sale to members of the general public for the first time through a stock exchange.

• Knowing an IPO’s subscription status can give investors an indication of how much demand there is for shares, and how an IPO stock may perform once it hits the exchanges.

• Typically, only certain investors can participate in IPO bidding and subscribe to an IPO.

• Individual investors may not have access to IPO subscriptions, but research can help them find the right companies to invest in as they go public.

IPO Review

“IPO” is an acronym that stands for “initial public offering.” It represents the first time that a company offers shares for sale to members of the general public through a stock exchange. Prior to an IPO, you would not be able to find a company’s stock trading on an exchange such as the New York Stock Exchange, for example.

Prior to going through the IPO process, a company is private, and its investors usually include its founders, employees, and venture capitalists. A private company usually decides to go public to attract additional investment.

But it’s the tricky period before an IPO, when a company is still private, that many prospective eligible investors look to make a move and get in early. This is when investors “subscribe” to an IPO, which means they’re agreeing or signaling their intent to buy a company’s stock prior to its IPO.

When the IPO executes, those investors may be able to purchase the number of shares to which they previously agreed. Typically, only certain investors can participate in IPO bidding and subscribe to an IPO.

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, an effective app is one with an intuitive interface and powerful features to help make trades quickly and easily.

IPO Subscription Status Defined

A company’s IPO subscription status is a gauge of demand for an IPO. It refers to how many investors have subscribed, or signaled their intention to buy shares in the company. The goal of an IPO is for a company to sell all of its shares — or, to reach an IPO subscription status of fully subscribed, and a valuation in line with its calculations for pricing its IPO.

In that event, all of a company’s shares are spoken for prior to hitting the exchanges, and any leftover shares won’t see their values reduced in order to attract buyers. Early investors looking to cash out after an IPO typically must wait for the lock-up period to expire before they can sell their shares.

Keep in mind that many IPO stocks in the U.S. are bought by large, institutional investors involved with the IPO’s underwriter, an investment bank that helps a company prepare for an IPO and purchases shares in the company and resells them. But although the average retail investor is not typically included in an IPO roadshow, they may still be able to buy an IPO stock at its offering price.

Some brokerages have programs that allow qualified investors to request IPO stocks at their offering price, but there’s no guarantee those investors will actually get the shares.

Recommended: What Is IPO Due Diligence?

Why IPO Subscription Status Matters

An IPO’s subscription status matters in that it can give investors a sense of how an IPO stock may perform once it hits the exchanges.

Shows Demand of IPO Shares

Knowing an IPO’s subscription status can give investors an inkling as to how much demand there is for shares — if demand is high (meaning an IPO is fully or oversubscribed), it’s a signal that an IPO stock may gain value after its market debut. But it’s not a guarantee.

Conversely, an undersubscribed IPO sends a signal that investors aren’t that interested. And when stocks do hit the exchanges, they may see a price reduction soon thereafter.

💡 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.

The Takeaway

While individual investors may not have access to IPO subscriptions, they can still participate in the IPO market. The key is doing thorough research to find the right companies to invest in as they go public.

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

FAQ

How many times can an IPO be oversubscribed?

IPOs get oversubscribed frequently, which means that more investors want to buy shares than a company has available to issue. There isn’t really a limit as to how many times it can be oversubscribed, but depending on the category of investor, it’s not uncommon for IPOs to be oversubscribed dozens or even hundreds of times.

What is an IPO subscription rate?

IPO subscription rates are an estimate of how many bids are received for each investor category (such as retail investors and institutional investors), divided by the number of shares allotted for each category by the company. This helps determine the level of participation among investors in each category.

What does IPO subscribed 2 times mean?

Essentially, it means that demand for IPO shares is twice as high as the number of available shares. The degree of oversubscription is typically shown as a multiple, such as two times, or five times, or whatever the multiple might be. The higher the multiple, the more demand there is for shares.

What happens if an IPO is not fully subscribed?

If an IPO is not fully subscribed, a company may lower the price of its shares or reduce the number of them to try to attract more investors. Undersubscription typically signals low investor confidence and demand.

Photo credit: iStock/SeventyFour

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-082

Sep

2025

IPO Book-Building Process Explained

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is Book Building?
Book-Building Process
What Is Partial Book Building?
What Is Accelerated Book Building?
What Effect Does Book Building Have On IPO Prices?
FAQ

Initial public offering (IPO) book building is a process to help determine the share price for an IPO.

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.

Read on to discover how book building works and how it can affect the price of an IPO.

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 ensure 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. It is considered the most efficient way to set prices and is recommended by all the major stock exchanges.

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 “build the book” of that feedback and determine the value of the private company’s shares.

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

This is typically 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.

Book building 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.

Book building can help 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.

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, as a firm commitment underwriter (the most common underwriting arrangement in an IPO), 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 determine 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 typically 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 happens when the offering price is below the share price on the first day of trading. In other words, the IPO is selling for less than its true market value. With an underpriced IPO, a company is said to have left money on the table because they could have set the offering price higher.

An overpriced IPO — meaning the offering price is above the stock’s true market value and higher than investors are willing to pay for it — can have negative implications for the future price of a stock due to poor investor response.

Investors may 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 generally 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 or overpriced. 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 five 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 to set a fair market-based price for shares of the company looking to go public.

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

FAQ

What are the steps in book building?

There are five 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 up 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 bidders who meet or exceed the final cutoff price.

What is 100% book building?

100% book building is when all of the company’s shares are sold through the book-building process. The final issue price of the shares is determined entirely by investor bids and demands.

Who carries out book building in an IPO?

The underwriters in an IPO, which are typically large investment banks, carry out the book building process. They build the book by asking institutional investors to submit bids for the number of shares of the company they’d be willing to buy and the price they would pay for the shares. They then list and evaluate investor demand based on the bids and use that information to set a price for the shares.

Photo credit: iStock/PeopleImages

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-080

Sep

2025

What Are Cyclical Stocks?

By Rebecca Lake | Financial Independence, Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is a Cyclical Stock?
Cyclical Stocks Examples
Cyclical Stocks vs Non-cyclical Stocks
Pros and Cons of Investing in Cyclical Stocks
How to Invest in Cyclical Stocks
FAQ

Cyclical stocks are stocks that tend to follow trends in the broader economic cycle, with returns fluctuating as the market moves through upturns and downturns. A cyclical stock is the opposite of a defensive stock, which tends to offer more consistent returns regardless of macroeconomic trends.

Investing in cyclical stocks could be rewarding during periods of economic prosperity. During a recession, however, certain types of cyclical stocks may be affected if consumers are spending less.

Key Points

• Cyclical stocks may align with economic trends, offering higher returns during periods of growth.

• Cyclical stock investments may represent discretionary items that consumers may be less likely to purchase when the economy slows.

• Travel, retail, and entertainment are examples of cyclical sectors.

• Defensive stocks may provide more stable returns independent of economic trends, contrasting with cyclical stocks.

• Cyclical stocks can be subject to uneven short-term returns, but may offer long-term appreciation.

What Is a Cyclical Stock?

A cyclical stock is a stock that may perform differently depending on what part of the market cycle the stock market is in at a given time. These types of stocks tend to overlap with the broader economic cycle. As such, the stock market is not static; it moves in cycles that often mirror the broader economy. To understand cyclical stocks, it helps to understand how the market changes over time, with the understanding that this has a different impact on different types of stocks.

A single stock market cycle involves four phases:

Accumulation (trough)

After reaching a bottom, the accumulation phase signals the start of a bull market and increased buying activity among investors.

Markup (expansion)

During the markup phase more investors may begin pouring money into the market, pushing stock valuations up.

Distribution (peak)

During this phase, investors begin to sell the securities they’ve accumulated, and market sentiment may begin to turn neutral or bearish.

Markdown (contraction)

The final phase of the cycle stock is a market downturn, when prices begin to significantly decline until reaching a bottom, at which point a new market cycle begins.

Cyclical Stocks Examples

The cyclicality of a stock depends on how they react to economic changes. The more sensitive a stock is to shifting economic trends, the more likely investors would consider it cyclical. Some of the most common cyclical stock examples include companies representing these industries:

• Travel and tourism, including airlines

• Hotels and hospitality

• Restaurants and food service

• Manufacturing (i.e., vehicles, appliances, furniture, etc.)

• Retail

• Entertainment

• Construction

Generally, consumer cyclical stocks represent “wants” versus “needs” when it comes to how everyday people spend. That’s because when the economy is going strong, consumers may spend more freely on discretionary purchases. When the economy struggles, consumers may begin to cut back on spending in those areas.

Cyclical Stocks vs Non-cyclical Stocks

Cyclical stocks are the opposite of non-cyclical or defensive stocks. Noncyclical stocks don’t necessarily follow the movements of the market. While economic upturns or downturns can impact them, they may be more insulated against negative impacts, such as steep price drops.

Non-cyclical stocks examples may include companies from these sectors or industries:

• Utilities, such as electric, gas and water

• Consumer staples

• Healthcare

Defensive or non-cyclical stocks represent things consumers are likely to spend money on, regardless of whether the economy is up or down. So that includes essential purchases like groceries, personal hygiene items, doctor visits, utility bills, and gas. Real estate investment trusts that invest in rental properties may also fall into this category, as recessions generally don’t diminish demand for housing.

Cyclical stocks may see returns shrink during periods of reduced consumer spending. Defensive stocks, on the other hand, may continue to post the same, stable returns or even experience a temporary increase in returns as consumers focus more of their spending dollars on essential purchases.

Dive deeper: Cyclical vs Non-Cyclical Stocks: Investing Around Economic Cycles

Pros and Cons of Investing in Cyclical Stocks

There are several reasons to consider investing in cyclical stocks, though whether it makes sense to do so depends on your broader investment strategy. Cyclical stocks are often value stocks, rather than growth stocks. Value stocks are undervalued by the market and have the potential for significant appreciation over time. Growth stocks, on the other hand, grow at a rate that outpaces the market average.

If you’re a buy-and-hold investor with a longer time horizon, you may consider value cyclical stocks. But it’s important to consider how comfortable you are with investment risk and riding out market ups and downs to see eventual price appreciation in your investment. When considering cyclical stocks, here are some of the most important advantages and disadvantages to keep in mind.

Pros of Cyclical Stocks

Some potential advantages of investing in cyclical stocks include the following.

• Return potential. When a cyclical stock experiences a boom cycle in the economy, that can lead to higher returns. The more money consumers pour into discretionary purchases, the more cyclical stock prices may rise.

• Predictability. Cyclical stocks often follow market trends, making it potentially easier to forecast how they may react under different economic conditions. This could be helpful in deciding when to buy or sell cyclical stocks in a portfolio.

• Value. Cyclical stocks may be value stocks, which can create long-term opportunities for appreciation. This assumes, of course, that you’re comfortable holding cyclical stocks for longer periods of time.

Cons of Cyclical Stocks

Some potential disadvantages of investing in cyclical stocks include the following.

• Volatility. Cyclical stocks are by nature more volatile than defensive stocks. That means they could post greater losses if an unexpected market downturn occurs.

• Difficult to time. While cyclical stocks may establish their own pricing patterns based on market movements, it can still be difficult to determine how long to hold stocks. If you trade cyclical stocks too early or too late in the market cycle, you could risk losing money or missing out on gains.

• Uneven returns. Since cyclical stocks move in tandem with market cycles, your return history may look more like a rollercoaster than a straight line. If you’re looking for more stable returns, defensive stocks could be a better fit.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

How to Invest in Cyclical Stocks

When considering cyclical stocks, it’s important to do the research before deciding which ones to buy. Having a basic understanding of fundamental analysis and technical analysis can help.

Fundamental analysis means taking a look under a company’s hood, so to speak, to measure its financial health. That can include looking at things like:

• Assets

• Liabilities

• Price-to-earnings (P/E) ratio

• Earnings per share (EPS)

• Price/earnings ratio (PEG ratio)

• Price-to-book ratio (P/B)

• Cash flows

Fundamental analysis looks at how financially stable a company is and how likely it is to remain so during a changing economic environment.

Technical analysis, on the other hand, is more concerned with how things like momentum can affect a stock’s prices day to day or even hour to hour. This type of analysis considers how likely a particular trend is to continue.

Considering both can help you decide which cyclical stocks may be beneficial for achieving your short- or long-term investment goals.

The Takeaway

Cyclical stocks are stocks that tend to follow trends in the broader economic cycle, with returns fluctuating as the market moves. Cyclical stocks could be a good addition to your portfolio if you’re interested in value stocks, or you want to diversify with companies that may offer higher returns in a strong economy.

Investing in cyclical stocks does have its pros and cons, however, like investing in just about any other type or subset of securities. Investors should make sure they know the risks, and consider talking to a financial professional before making a decision.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

What are the four cycles of the stock market?

The market generally moves through four cycles: Accumulation, markup, distribution, and markdown, which may also be called trough, expansion, peak, and contraction. Note that it may take years for a single market cycle to complete.

What is the definition of “cyclical stock?”

Cyclical stocks are stocks that tend to follow trends in the broader economic cycle, with returns fluctuating as the market moves.

What are some examples of cyclical stocks?

Cyclical stocks may be shares of companies in industries such as travel and tourism, restaurants and food service, certain facets of manufacturing, retail, entertainment, or construction.

About the author

Rebecca Lake

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-120

What Is Volume in Stock Trading? How Investors Can Use It

What Is Volume in Stocks?

Volume vs Float

Volume vs Market Cap

What Does Stock Volume Tell You?

What It Means When Stock Volume Goes Up

What It Means When Stock Volume Goes Down

Where Can You Find Stock Volume on a Chart?

How Traders Can Use Volume

Exhaustion Moves

Price Reversals

Breakouts

Bullish Signals

Types of Indicators to Measure Stock Volume

On Balance Volume (OBV)

Volume Price Trend (VPT)

Ease of Movement

The Takeaway

FAQ

Is high trading volume good?

Can trading volume rise, but prices fall?

What does low trading volume mean?

What Is IPO Due Diligence?

IPO Due Diligence Process

1. Organizational Data

2. Licensing and Taxation

3. Board and Employee Information

4. Financial Information

5. Customer/Service Information

6. Company Property

Objective of IPO Due Diligence

Benefits of Due Diligence Process

IPO Due Diligence Benefits for the Company

IPO Due Diligence Benefits to Investors

Next Steps in Filing an IPO

The Takeaway

FAQ

What is due diligence for an IPO?

What is IPO compliance?

What are the types of IPO due diligence?

What Is IPO Subscription Status?

IPO Review

IPO Subscription Status Defined

Why IPO Subscription Status Matters

Shows Demand of IPO Shares

The Takeaway

FAQ

How many times can an IPO be oversubscribed?

What is an IPO subscription rate?

What does IPO subscribed 2 times mean?

What happens if an IPO is not fully subscribed?

IPO Book-Building Process Explained

What Is Book Building?

Book-Building Process

What Is Partial Book Building?

What Is Accelerated Book Building?

What Effect Does Book Building Have On IPO Prices?

The Takeaway

FAQ

What are the steps in book building?

What is 100% book building?

Who carries out book building in an IPO?

What Are Cyclical Stocks?

What Is a Cyclical Stock?

Accumulation (trough)

Markup (expansion)

Distribution (peak)

Markdown (contraction)

Cyclical Stocks Examples

Cyclical Stocks vs Non-cyclical Stocks

Pros and Cons of Investing in Cyclical Stocks

Pros of Cyclical Stocks

Cons of Cyclical Stocks

How to Invest in Cyclical Stocks

The Takeaway

FAQ

What are the four cycles of the stock market?

What is the definition of “cyclical stock?”

What are some examples of cyclical stocks?

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