Syracuse Business Daily

Initial Public Offerings (IPOs)?

When a company goes public through an IPO, why does the stock price always seem to rise on the first trading day? I might be wrong here but it seems to me it always rises.

Public Comments

1. Do you know why the chicken has such strange feet.? everyone always wonders about the egg, now me. no no no
2. The only ones you ever hear about are the ones that go up dramatically on day 1. The large majority do little to nothing, some even fall, forcing the syndicate to help support the price of the stock by buying it.
3. In fact KevK is correct. This apparent phenomenon doesn't happen to all stocks. It happens to some and to others the inverse, they fall. As to why it happens to some in large percentages? I would really guess it could be due to the information flow and lags in the market. Perhaps, as companies go public, once they issue the stocks, the silent period is over, and they can open their mouth about future plans. The market can see these plans as good or as bad.
4. As the other answerers suggested, there are many instances in which the stock price falls though it may ostensibly seem otherwise. With regards to the somewhat frequent increase in share value, one of the marketing tactics utilized by underwriters when issuing an IPO is to underpice the stock so as to stimulate interest and attract more investors. This in turn creates more demand for the stock once it's issued, making it a "hot" commodity. With that in mind, basic economic theory tells you that increases in demand are likely to cause a subsequent increase in price which generally continues until the market for that stock cools [and, as mentioned, the 40-day quiet period ends at which point the SEC sanctions the issuance of research/earnings reports]. Hope this helps.
5. The above are correct, that this does not happen all the time, and there are some very notable cases where an IPO completely tanks when it goes public. A good example of that is Vonage (VG:NYSE) It just dropped like a stone for weeks after its release. But I think what you're really asking is Why so many do skyrocket like that. The answer is a fairly simple case of supply and demand. Take a fairly recent IPO, NYMEX (NMX:NYSE) The NYSE stock was doing well, the Nasdaq and ICE and CBOT stocks were all doing well, so when a new exchange stock was coming public, people were excited. The NMX started to price themselves months ahead of time to determine what they could sell to initial shareholders for how much, but those sales are done directly through the Group the Underwrites the loan. People or institutions sign up to buy some IPO a long time ahead of time, and as the time comes, they begin to bid and settle on an 'Issue Price' In this case the issue price was approximately $48 per share. But NYMEX wasn't selling the hole company public, they only sought to raise approximately $3.60 Billion in capital so they only sold a realtively small number of shares, 90million in this case. So the price they were sold is determined a bit ahead of time, not open to the public and often set conservatively to prevent flooding the market. When the shares actually started trading, the market jumps on them, and the demand exceeds the number of shares available for purchase, meaning people have to outbid each other to get any. Within approximately 15 minutes the shares went from $48 to $150 and volume sold exceeded the total number in existance. After that once the market calms down a little the price began to fall down a bit. But it's generally about 3 things: 1) The initial price is not a 'market' price, so is usually wrong or intentionally conservative 2) Demand is usually higher than amount available 3) The side selling, who initially owned the shares are usually more Savy investors than the general public buying them. So on average, you're going to see large moves in IPOs on their entry into the market. These can be very difficult to play as an individual investor and you can get eaten alive as things spike up and down, with your order getting a little slower execution time than bigger institutions. If you can get into an IPO before it goes live and you like it, good, if you want to get into it after a few days, good. But as an individual, I would almost never suggest trying to jump in on a Hot new IPO the day it comes out.
6. First, it doesn't always go up, you just hear about and remember the ones that go up. Examples: Vonage and Blackstone. Second, the investment bank that is bringing a company public is legally required to try and price the issue FAIRLY not at the maximum price that will still sell the entire issue. Thus, they will sometimes price it under the price that it might fetch otherwise.
7. Underwriters structure IPOs so that there is strong demand in the secondary market. The retail investors who did not get an allocation buy on the first day, causing the price to pop up. Agree with Kev, Frank, mook, and oh boy! as to what happens after day 1.