What Is a Hot IPO?

The term hot IPO refers to an initial public offering with significant demand.

These IPOs are popular, drawing a tremendous amount of interest from investors and the media even before they hit the market. This hype and attentioܫn generally 𝔍lead to a significant rise in share prices after the company goes public.

Hot IPOs may be risky, especially when it comes to investing in companies that don't have a proven track record of success.

How Hot IPOs Work

Private companies that want to go public often do so by issuing stock through an 澳洲幸运5官方开奖结果体彩网:initial public offering. They can raise a substantial amount of money in a short time, particularly if the issuance attracts public attention and becomes a hot IPO. An IPO gives a private company a chance to cash in on the public’s demand for its shares.

The first step is for the company to find at least one investment bank to act as an 澳洲幸运5官方开奖结果体彩网:underwriter. The underwriter(s) markets the IPO, helping the company set a per-share price. Banks assume a specific number of shares, which they will offer to their buyers, who are either 澳洲幸运5官方开奖结果体彩网:institutional or retail investors. The banks collect a portion of the sale proceeds as a fee, which is called the 澳洲幸运5官方开奖结果体彩网:underwriting spread.

IPOs are considered hot if and when they draw a great deal of attention from the media, which can lead to a lot of interest from investors. By going through the hot IPO process, companies can raise a lot of capital i𝕴n a short amount of time. This allows them to pay off their debts, fund their operations, and ꦛset aside money for future growth.

The increased demand for shares in a hot IPO often leads to a sharp rise in the price of the stock soon after it begins trading. This sudden increase in share price is often not sustainable, which means the price drops. T🌃his pattern can have a big impact on the market itself.

Sharp price moves can affect initial 澳洲幸运5官方开奖结果体彩网:shareholders after trading opens on the 澳洲幸运5官方开奖结果体彩网:secondary market. Underwriters may give preferential treatment to high-value clients when offering shares in a hot IPO, so they bear some rꦏisk if they overprice the stoc♐k. 

Special Considerations

Hot IPOs appeal to investors who anticipate that the demand for shares will outstrip the number of shares offered. IPOs with more demand than supply are considered oversubscribed, making them a target for short-term 澳洲幸运5官方开奖结果体彩网:speculators as well as those who see a long-term opportunity in holding the equity.

Because a hot IPO is likely to be oversubscribed, companies often allow their underwriters to increase the size of the offering to accommodate ไmore investors and 𒀰make more money.

Underwriters must balance the size of the IPO with the appropriate price for the level of interest in the offering. When done correctly, this balancing will maximize profit for the company and its underwriter banks.

If a hot IPO is an 澳洲幸运5官方开奖结果体彩网:underpriced issue, it will usually see a rapid rise in price after the shares hit the market and the market adjusts to the high demand for the stock. Overpricing the IPO can lead to a 🍷rapid fall in prices, even though the higher price benefits the underwriting bank issuing the stock since it only makes money on the initial issue.

Examples of a Hot IPO

Social giant Facebook's initial public offering is commonly considered a hot IPO. In early 2012, analysts indicated that its long-awaited IPO, seeking to raise about $10.6 billion by selling more than 337 million shares at $28 to $35 per share, could generate such significant interest from investors.

Those analysts predicted an oversubscribed IPO.

When the market opened on May 18, 2012, investor interest showed a higher demand for the company's shares than it offered. To take advantage of the oversubscribed IPO and fulfill investor demand, Facebook increased the number of shares to 421 million. But it also raised the price range to $34 to $38 per share.

Facebook and its underwriꦉters effectively raised both the supply and price of shares to meet dema♔nd, diminishing their oversubscription.

However, it quickly became clear that Facebook was not oversubscribed at its IPO price, as the stock fell precipitously in its first four months of trading. The stock failed to trade above its IPO price until July 💦31, 2013.