It’s possible to short an initial public offering (IPO) — but the circumstances can vary by investor. While traders can sell short IPO shares, investors allocated IPO shares may have to wait for a lock-up period to expire before they can sell.
Selling short an IPO on the listing day also has extra challenges you should know about. This article will cover how it works, when to do it, and any possible complications you might encounter in the process.
Initial Public Offering
When a private company offers its shares to the public market in a new stock issuance, it’s called an initial public offering (IPO). IPOs help firms raise capital — which they can then use to finance new projects in the hope of growing the business. Equity IPOs can be a more effective means of raising capital versus tapping the primary market for more debt. The more debt a firm takes on, the higher its leverage ratio.
In order to hold an IPO, companies must meet requirements put in place by the U.S. Securities and Exchange Commission (SEC). The IPO process can be costly for a company — typically, companies hire an investment bank to help market the IPO, analyze investor demand, determine an IPO price, and decide when to go public.
The company and the underwriting investment bank specialist work together to price the stock and promote the IPO to stir up investor interest. Often, shares are sold at a discount by the company to the underwriting bank. The underwriter then sells the shares on the market at the IPO.
IPOs are also seen as an exit strategy for business owners. Founders can cash in after years of hard work — they essentially turn their large stake in their business into a financial position. For example, if a founder owns 75% of their company, and the company goes public with all its shares at a $1 billion valuation, the founder could monetize their stake with a $750 million cash position (not including fees and taxes). Employees with stock options can also benefit.
Can You Short an IPO?
IPO stocks can be sold short once they are trading on public markets, known as the secondary market. Shorting IPO shares on the listing day can be done, though there are some challenges.
Shorting a Stock
Shorting a stock is a strategy traders use to profit from a decline in the price of a stock. Any stock available for trading can be shorted. It is risky considering that the stock price can only go to zero — in which case a profit of 100% is realized (not including taxes and commissions). The risk is that the stock price increases. There is no theoretical limit to how high a share price can go.
A short sale happens when you borrow a stock and repay it in the future. The goal is to see the stock drop in value. When you sell short, you buy the shares, immediately sell them, then buy them back later. You want to buy the shares back at a price less than at which you lent them.
There is a fee for borrowing when selling shares short. That cost can be as low as 0.3% (on an annualized basis) for stocks with very little short interest, but it can soar to 30% for hot stocks with extremely high short interest. You might also be required to post collateral to sell short.
For example, let’s say you want to sell short shares of XYZ stock that currently trade at $100 per share. You enter an order to sell short the shares and you receive $100 per share. A month later, the stock price has dropped to $80, and you decide to close your short position by repurchasing the shares in the market. You buy back the shares for $80. Your profit on those stocks is $100 – $80 = $20.
Challenges of Shorting an IPO
While shorting an IPO on listing day is allowed, there are practical limitations that could make it difficult.
A critical facet to shorting IPO shares is being able to borrow the shares from a brokerage firm. A broker needs an inventory of stock from which to lend and a company often only takes a small part of the company public, which can limit shorting opportunities. On IPO day, the two primary entities holding an inventory of shares are the underwriting banks and investors (both institutional and retail).
The IPO underwriters cannot lend shares for short sale for 30 days, per U.S. SEC rules. Investors can lend out their shares to investors seeking to short the IPO stock. That said, some shareholders might be unwilling to lend their shares.
You can short an IPO once it starts trading on the public market. But it’s worth remembering that shorting carries risk and there might be a high cost to borrow shares.
With SoFi Invest®, qualified investors can start IPO investing as soon as they’re ready, getting allocated IPO shares before they start trading on the open market.
How soon can you short an IPO?
You can short an IPO once it begins trading on the public stock market. The IPO lock-up period typically lasts from 90 to 180 days. It is intended to prevent too many shares from flooding the market in the early days of the IPO. A high supply of shares could drive down the price of the IPO stock.
Can you sell an IPO immediately?
An investor who purchases shares on the secondary market can sell shares immediately. Investors who were allocated IPO shares have a lock-up period before they can sell. Learn more about selling an IPO.
How long until you can sell an IPO?
A company founder, a longtime employee holding company stock, or an investor allocated IPO shares must wait for the lock-up period to elapse before selling their shares. The IPO lock-up period might last anywhere from 90 to 180 days after the IPO. There might be multiple lock-up periods that end on different dates, too.
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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.