The term hot IPO refers to an initial public offering (IPO) with substantial demand. These IPOs attract a significant amount of attention from investors and the media even before they hit the market. This hype generally leads to a notable rise in share prices once the company goes public. However, investing in hot IPOs can be risky, especially for companies without a proven track record of success.
Key Takeaways
- A hot IPO is an initial public offering that garners considerable interest from the media and investors.
- High demand typically leads to sharp price increases in the secondary market, though these are generally unsustainable.
- Companies collaborate with investment banks to underwrite, handle pricing, marketing, and decisions about shares and price ranges.
- Demand for shares in a hot IPO often exceeds initial supply, which may necessitate revising the price upward.
- Underpriced hot IPOs tend to see their stock price rise post-trading, whereas overpriced ones tend to experience a price drop.
How Hot IPOs Work
Private companies aiming for public status often do so through an IPO. They can swiftly raise substantial capital, particularly if the issuance captures public attention and becomes a hot IPO. An IPO allows a private firm to leverage public demand for its shares.
The company’s first step is to identify an investment bank to act as an underwriter. The underwriter markets the IPO and helps set an appropriate per-share price. Banks assume a specific number of shares to offer to their buyers—be they institutional or retail investors. Banks collect a portion of the sale proceeds as fees, known as the underwriting spread.
IPOs become ‘hot’ if they garner substantial media attention, thereby attracting significant investor interest. By going through the hot IPO process, companies can swiftly generate much-needed capital to pay off debts, fund operations, and plan for future growth.
Increased share demand in a hot IPO usually results in a sudden spike in stock prices upon beginning trading. This sharp rise often isn’t sustainable, typically leading to price drops later. Sharp price movements can impact initial shareholders in the secondary market. Underwriters often give preferential treatment to high-value clients when offering shares in a hot IPO, and they bear some risk if they overprice the stock.
Special Considerations
Hot IPOs entice investors bullish on exceeding the offered shares’ demand. Such heavily sought-after IPOs attract both short-term speculators and long-term investors. Oversubcribed IPOs might prompt companies to let underwriters increase the offering size, thereby accommodating more investors and improving revenue.
Underwriters must balance IPO size with proper pricing to match market interest. Properly pricing a hot IPO maximizes profits for both the issuing company and its underwriting banks. Underpriced issues usually see rapid price surges post-market debut as prices adjust to high demand. Conversely, overpriced IPOs may experience swift price declines despite higher initial revenues from the issuance.
Alternate Routes to Public Listing
Companies may also opt for other admission routes like a direct listing or direct public offering instead of an IPO.
Examples of Hot IPOs
[Facebook’s initial public offering] serves as a classic example of a hot IPO. Around early 2012, analysts predicted immense interest in Facebook’s long-awaited IPO, with aims to raise about $10.6 billion by selling over 337 million shares priced between $28 to $35 each. Such robust interest led to predictions of an oversubscribed offering.
By the market open on May 18, 2012, investor demand outstripped supply. To meet this demand, Facebook increased the share count to 421 million while simultaneously raising the price range to $34 to $38 per share. This strategy effectively mitigated oversubscription by elevating both supply and price.
However, Facebook’s IPO did not maintain its initial hype post-launch. The stock price fell significantly in the first four months of trading and did not exceed its IPO price until July 31, 2013.
Related Terms: Underwriter, Shares, Stock, Initial Public Offering, Investors.
References
- CFI. “Hot IPO”.
- The Free Dictionary. “Hot IPO”.
- IPO Pro. “Getting in on an IPO”.
- Forbes. “Facebook Prices Third-Largest IPO Ever, Valued At $104 Billion”.
