how hot ipos work
private companies that want to go public often do so by issuing stock through an 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 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 institutional or retail investors 1 the banks collect a portion of the sale proceeds as a fee which is called the 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 in a short amount of time this allows them to pay off their debts fund their operations and set 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 2 this pattern can have a big impact on the market itself sharp price moves can affect initial shareholders after trading opens on the secondary market underwriters may give preferential treatment to high value clients when offering shares in a hot ipo so they bear some risk if they overprice the stock a hot ipo is not a guaranteed win for investors because the hype doesn t bear the planned fruit for the investor special considerationshot 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 speculators as well as those who see a long term opportunity in holding the equity 3because a hot ipo is likely to be oversubscribed companies often allow their underwriters to increase the size of the offering to accommodate more investors and make 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 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 companies have other ways they can go public including a direct listing or a direct public offering examples of a hot iposocial 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 4those analysts predicted an oversubscribed ipo 