What is an IPO? An Initial Public Offering is the first time a privately held company issues stock to the public. IPOs are one of the biggest FOMOs for investors: the Fear Of Missing Out. And fear is a dangerous emotion, where all common sense might go out of the window!

⏱️TIMESTAMPS⏱️
00:00 Introduction to IPO
01:26 Funding rounds and seed capital
03:13 Reasons for an IPO
03:47 Why invest in an IPO
05:43 IPO target price range
07:27 IPO first day returns
09:35 IPO long term share price performance
11:21 IPO S-1 registration statement
13:00 IPO financial metrics
14:07 IPO analysis
15:28 IPO financial growth curve

This is the Age of the Unicorn: tech startups worth $1 billion or more, many of which want to IPO. Your chance to ring the opening bell on the stock market, get lots of applause, and be the focal point of the financial and business news…. for at least a day, or maybe just half a day depending on what else is happening in the world. An #IPO is a financial journalist’s dream: a great opportunity to sell sensation and excitement!

So why does a company IPO? According to the official language that companies include in SEC registration documents, the principal purposes of Initial Public Offerings are to increase capitalization and financial flexibility, create a public market for the common stock, and enable access to the public equity markets for the company and its stockholders. Translated: the company either wants to raise money for growth, or provide an exit opportunity for existing shareholders, or a combination of both.

In normal conditions of the stock market, there is some match between supply (which goes up as the price goes up) and demand (which goes down as the price goes up), which leads to a price. If there’s good news about a company, the demand curve moves to the right, and a new price is set. In an IPO, supply and demand work a bit differently. The supply or availability of shares is very limited. If the price goes up, there are not that many more shares available. Additionally, there is not an opportunity yet to short-sell an #IPO stock on day 1. The other reason for the limited supply is that a lot of shareholders (existing and new) have agreed to some type of lock-up, promising not to sell any shares for a certain amount of time. The IPO hype moves the demand curve to the right, while the supply curve is very steep. Bang, there’s what is known as a “first day pop” of the IPO share price!

Let’s look at the first day returns on the IPO shares of some of the big name IPOs of the past couple of years. An example of a big day 1 gain was Twitter in its 2013 IPO. Up 73% at the end of day 1, after peaking during the day at more than double the IPO price. Facebook’s 2012 IPO was up just 1% at the end of day 1, after peaking at 18% above the IPO price during the day. The stock struggled to stay above the IPO price for most of the day, forcing underwriters to buy back shares to support the price. Snap closed up 44% in its 2017 IPO at the end of day 1, after being up 53% earlier in the day. Lyft closed up 9% in its March 2019 IPO at the end of day 1, after popping to 23% immediately at the start of trading. Uber closed down 7% in its May 2019 IPO. While this is by no means a representative sample of all possible IPOs in all markets, three things jump out. One: it’s very difficult (maybe even impossible) to time the buying or selling of shares on a possibly volatile first day of trading. Easy with the benefit of hindsight, but very nearly impossible in the heat of the battle. Two: overall market sentiment, which can go from ecstatic one day to utterly depressed the next day, or both of these during the same day, can significantly influence IPO performance. Three: day 1 gains are possible, but certainly not guaranteed.

Want to track the total return on your stock portfolio (share price increase/decrease plus dividends received), then check out the easy-to-use online portfolio tracker called Sharesight: https://www.sharesight.com/thefinancestoryteller/

Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and #investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better #investing decisions. Philip delivers finance training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!