IPOs or Initial Public Offerings is when a private company offers its stock to the general public for the first time. IPOs are normally issued by companies trying to raise capital for their expansion plans. Nevertheless, IPOs are not restricted to just companies trying to raise capital. They can also be issued by large private companies that want to become a public listed company. When a company wishes to issue an IPO, it will engage the services of an underwriting firm to help it determine the scope of the IPO. Issues that often need to be determined and finalized include the kind of stocks to issue, the offer price, the number of stocks to issue and the launching date of the IPO.show more
IPOs are usually very popular with investors as they offer them the chance to cash in on their investments within a very short time frame. When an IPO is first traded on the exchange, it is very difficult to determine exactly how well or how poorly the IPO will perform. This is due to the fact that there is no historical data to gauge the performance of the stock with. In addition, companies that are going for IPOs are essentially undergoing a transitory period where its future growth and hence its intrinsic value is uncertain.
IPOs can be traded in one of two ways, through shares issued directly by the underwriter of the IPO or through the stock exchange. IPOs are normally initially released to the primary market. The primary market is where investors subscribe for the stocks that are to be made available through the IPO. Payments for the stocks subscribed are paid directly to the underwriter of the IPO. It should be noted that investors do not always get the number of stocks that they subscribe to. In situations where the stocks are oversubscribed, the underwriter will determine how many stocks to award to the subscribing investors. For example, an investor may subscribe for 10,000 shares. However due to the IPO being oversubscribed, the investor may only receive only 1,000 shares. The only way for an investor to obtain more shares will be to buy them on the stock exchange when the IPO becomes available for trading.
Usually when an IPO officially becomes available for trading on the stock market, there is usually considerable excitement surrounding the IPO especially when the stocks are oversubscribed several times over. This is where an investor can make a killing if he is able to gauge the demand for the stock correctly.
For IPOs since the trading action begins from the minute that the stock becomes available for trading, the correct time frame for the chart used should be in minutes. The price of the stock often shoots up within the first half hour of trading when eager investors begin chasing after the stocks. After the initial 30 minutes of trading, the price of the stock can either remain strong or start to decline.
If you are looking to trade IPOs on a longer term, then the best option with be to wait for a few months before entering the market. This is because you want to wait until there is some historical data to base your market analysis on. There is no doubt that IPOs are exciting to trade with. But always ensure that you have a proper risk management plan in place, before jumping into IPOs.