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ProActiveFinancialPlanning.com |
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The Financial Planning Center Comprehensive Financial Planning
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How to Manage Your Investment Risk |
Common Investment Mistakes or Poor Investment Decisions?
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Common Investment Mistakes or Poor Investment Decisions? Diversification vs. Asset Allocation-Managing Investment Risk Hope for the Best but Plan for the Worst Summary |
IPOs: Initial Public Offerings When a company goes from a privately owned company to a publicly owned company, its stock is sold to the investing public for the first time. This is an Initial Public Offering referred to as an IPO. An IPO is either a hot issue or it is not. A hot IPO has generated considerable market interest - “demand.” When the demand for the stock is higher than supply, the price will increase to a price-level where demand and supply are in equilibrium. A hot IPO can increase significantly above the IPO price. Underwriters and their brokers are well aware of the demand of a hot issue and the lucrative potential it offers prior to the offering. Hot issues are usually allocated to the best brokers who in turn offer the securities to their best clients. Hot issues are extremely difficult to obtain. If an IPO is not a hot issue and the supply is greater than the demand, a significant amount of shares are available to all brokers who in turn will try to sell them to anyone who is willing to purchase them. Studies have shown that on average, IPOs may temporarily trade above the IPO price but within a short period of time fall below the IPO price. It is common practice for underwriters and their brokers to artificially support the price of an IPO. At any given price point, underwriters may buy the stock in the open market creating artificial demand temporarily supporting the price of the security. Brokers can help to support the price by discouraging investors from immediately selling (referred to as flipping) the IPO. Why would a broker do this? In some cases, a broker may lose any commissions generated from the sale of an IPO if the client flips the stock in a short period of time. Creating artificial demand is done in the best interest of the large investment banking clients not the small retail client. This module is available by email in a seven-page, printable version upon request. Contact ProActive Financial Planning to Request. |
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