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What is a hot IPO

A hot IPO is a first public offer to participate in a company whose shares appeal to many investors and for which demand is high.

There are other ways to go public other than an IPO, including direct listing or a direct public offering. When a company begins the IPO process, a specific set of events takes place, facilitated by the chosen bank insurers.


Companies that choose to issue shares via an IPO can raise a substantial amount of money in a short time, especially if the issue gets public attention and becomes a hot IPO. An initial public offering gives a private company the opportunity to respond to public demand for its actions.

When a company decides to make such an offer, it usually finds one or more investment banks to guarantee the issue and make arrangements to sell shares on public exchanges. The underwriters market the IPO because they help the company set a price per share. The underwriting banks will assume a specific number of shares which they will offer to their buyers and will collect part of the sale proceeds as fees. These buyers can be institutional or retail customers. The part they receive is the subscription spread.

IPO Hot oversubscribed

Attractive IPOs attract investors who expect demand for shares to exceed the number of shares offered. IPOs with demand exceeding supply exceeds demand are considered oversubscribed, making it a target for short-term speculators as well as those who see a long-term opportunity to hold stocks. In addition, increased demand for stocks will cause the share price to rise sharply soon after trading begins. Usually this sudden increase in the share price is not sustainable.

Since a hot IPO is likely to be oversubscribed, companies will often allow their underwriters to increase the size of the offering to accommodate more investors and earn more money. The trick for the underwriters is to balance the size of the IPO with the appropriate price for the amount of interest in the shares. When done correctly, this balancing will maximize profits for the business and its underwriting banks.

If a hot IPO is an undercutting issue, it will usually see a rapid increase in prices after the stocks hit the market and the market adapts to the high demand for the stocks. Conversely, an overvaluation of the IPO can cause prices to fall rapidly, even if the higher price benefits the subscription bank issuing the shares, since it only makes money on the initial issue.

The initial shareholders are considerably affected by the strong price fluctuations after the opening of the markets to the general public. The underwriters sometimes give preferential treatment to high value clients when offering shares in a hot IPO, so they bear some risk if they overvalue the security. However, a hot IPO does not provide a guaranteed gain for investors. Sometimes the hype of an upcoming IPO doesn’t pay off for the investor.

Facebook IPO as a cautionary tale

This was the case when the social giant Facebook announced its intention to go public. In early 2020, analysts said the long-awaited IPO on Facebook, seeking to raise about $ 10.6 billion by selling more than 337 million shares at a price of $ 28-35 per share, could spark such interest from investors. These analysts predicted an oversubscribed IPO.

When the market opened on May 18, 2020, as expected, investor interest showed that there was more demand for Facebook shares than the company was offering. To take advantage of the oversubscribed IPO and meet investor demand, Facebook increased the number of shares to 421 million but also increased the price range from $ 34 to $ 38 per share.

Indeed, Facebook and its underwriters have increased the supply and price of shares to meet demand and reduce oversubscription of securities. However, it quickly became clear that Facebook was not oversubscribed to its IPO price, as the stock fell sharply during its first four months of trading. The security was not traded above its IPO price until July 31, 2020.

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