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Author: TMFAmused Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 11923  
Subject: Initial Public Offerings FAQ Date: 12/3/1999 5:56 PM
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Welcome to the IPO Frequently Asked Questions! Take the time to read through this information and read the articles that are linked. When you are done, you should have a pretty good idea on the IPO process. If you need further clarification on something, the Fools on this board are willing to help you out. As of the date this was posted, all links are valid and the information should be current.

Shall we get started?

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Why is it called an Initial Public Offering if the general public cannot get in at the offer price?

IPO is somewhat of a misnomer. The public is usually involved after the fact. The initial offering occurs before the stock starts trading.

The underwriter takes subscriptions for the offering from their customers (usually institutional and important individual investors). Because these investors are underwriters' best customers, they want to keep them happy. In theory, this is why the reported IPO price averages 4% to 5% below the first day of trading close price. For some issues, this jump can be much higher.

Although small investors get shut out of the IPOs with real sex appeal, many IPOs settle down shortly after trading opens. Then you can make a decision on whether to buy the stock based on the same valuation fundamentals that apply to all stocks.

One note of caution: Taking out the first day's trading run-up, IPOs on average trail market index returns. Initial market enthusiasm is often dashed by the reality that earnings and free cash flow drive stock prices, not great ideas or stories. The less risky IPOs (proven track record) may not offer the home run potential, but usually provide solid returns.

I suppose you might say with regard to IPOs... that the "haves" have all the advantage. One thing is generally true, if you can get the shares on the IPO, you probably won't want them.

Where can I find information on upcoming IPOs?

These links will give you a variety of news, calendars, and articles on IPOs. Please be aware that some sites (or areas of sites) may be subscription only.

http://biz.yahoo.com/reports/ipo.html
http://gaskinsco.com
http://www.ipo.com
http://www.ipocentral.com
http://www.ipodata.com
http://www.ipomaven.com
http://www.ipomonitor.com
http://www.ipopros.com
http://www.ipo-fund.com
http://www.newsalert.com/free/headlines?Query=%22DIARY%22
http://www.openipo.com
http://www.ostman.com
http://www.redherring.com
http://www.worldfinancenet.com
http://www.zdii.com and select "IPO Insider"

Search for "IPO" with your browser.
Also read: IBD, Baron's – look for registration announcements

Make sure you take in all the information with a grain of salt, DON'T rely on the points of view of others, think about ANY companies before making a purchase.

Zenith39's basic criteria for selecting an IPO:
1. Venture capital players
2. Underwriters
3. Stock.... is it in right sector...competition
4. Thorough read of both retail and institutional demand
4. Past two weeks IPO performance of those that came public in that period

Where can I find financials on IPOs?

There's only one method of getting information on any IPO, the Prospectus registered with SEC. You can get the prospectus by calling the company and asking for it.

The SEC has a wonderful facility called "EDGAR": It stands for "Electronic Data Gathering, Analysis, and Retrieval." If you're in a hurry, you can download the latest prospectus off of Edgar for free. These tend to be large so go have a cup of Starbuck's [NASDAQ: SBUX] coffee while you're waiting:

http://www.sec.gov/cgi-bin/srch-edgar
http://www.freeedgar.com

I heard about an IPO from a friend or I received an email on an IPO. I can't find any information on it. What do I do now?

I'd be VERY careful if you couldn't find a company listed on any of the major IPO sites. You might want to check the Security and Exchange Commission's web site: http://www.sec.gov

What time of the day are IPOs available? Do they usually begin trading on a certain day?

IPO's can come at any time of the day. From the opening bell to the closing bell, timing is not an indication of how hot the deal is going to be

The market erroneously perceives, and history contradicts this, that IPOs that debut on Friday can be risky as early investors have the whole weekend to think about taking profits on Monday. If you feel strongly about a company, then the day it debuts shouldn't matter.

What is an “underwriter”?

The underwriter is the investment bank or banks that help the company go public. They get investor interest, handle much of the due diligence, and basically handle all of the prep work both inside and outside the company for the IPO.

The week before an IPO is set to trade, the sponsoring broker and others set an opening price trading range. The night before, a price is set. Most IPOs don't open until 10:00am and later because the market maker is trying to get his act set up. If the market maker thinks the demand for trading is strong, they will set the opening price way above the IPOs set price.

Zenith39's list of 5 best underwriters year after year:
Goldman Sachs
Morgan Stanley
Hambrecht & Quist
Robertson Stephens
Merrill Lynch.....Large non-internet deals

I am applying for an IPO. I was told I had to choose a price I was willing to pay: offering price or limit price. What is the difference?

Offering price means you buy at the final price for the IPO.
Limit price means you buy up to the specified price and no higher. So, if you wanted 100 shares and had only $1200 to commit to an IPO, you'd put down $12 a share.

Stock “XYZ” was priced at $15. The first trade was $30. Why?

The price it is "priced" at is for the IPO (those who are fortunate enough to be able to buy before the stock hits the open market). However, the price that it opens at can be substantially greater if there is big demand for it on opening day. Bidding for the stock can take place before it opens and that is why it will open higher than the IPO price. There is also the other case where the stock opens at the IPO price and drops because there is not enough interest in it. Risk and Reward but you can get burned too.

What is a lockup period? How long does it last? What happens when it is over?

The lockup period is the period, typically ranging from 90 to 180 days, after the deal comes, during which key executives and certain stockholders generally agree with the underwriters that they will not sell shares. Most underwriters require these agreements in order to protect their ability to stabilize the stock in the short period of time after the deal comes (and protect their customers too).

What is “flipping”? Why shouldn't I flip and lock in profits early?

When you receive IPO shares from a broker, you agree to hold those shares for a certain amount of time (usually 15 to 60 days). If you sell before this time, it is considered “flipping”. Chances are, the broker will not offer you IPOs for a certain length of time after you flip shares (varies by broker).

Since there are no SEC rules, they can even totally exclude you from any of their IPOs for the rest of your life, if they choose to do so. Usually, it the “blacklist period” last between 30 – 60 days. They don't even have to treat everyone equally. Up until these guys offered IPOs, you had to have an account at the underwriters' house. Then, if the account was large enough, you generated a LOT of commissions, and the broker liked your trading history, you might get some stock.

Full service brokers, on the other hand, often encourage flipping. They want their good clients to stay fat, happy, and generating commissions.

What is “aftermarket”?

The aftermarket is when the shares are traded on an exchange.

I have no chance of getting in on an IPO. Should sit by my computer and try to grab it when it opens?

IPO prices tend to trade at a huge premium at the market open. The daily high on the first trading day is likely within the first hour or so. If you put in a market order you'll likely pay a substantial premium. It's far better to wait 30 days after the trading has calmed down. In 99.9% of the cases, you could buy an IPO cheaper within a month of the IPO. In fact, some IPOs eventually end up below the offering price.

Level II is "must-have" if you are active in buying ipo's at the opening. Short-term traders need this, long-term holders do not. Without tools like Level II, you obviously will not be able to have some semblance of where the opening will be. In that case a limit order should be used to insure that you are not paying much more than you hoped in this case 46. If you are comfortable with a 46 limit then place the limit order as soon as the market opens. This will insure that if it opens at or below 46 you are very early in line to get filled as opposed to the people who put in their orders much later. Certainly you have ample time to cancel or adjust your order as the deals never open at the bell.


What is the difference between Level I and Level II quotes?

Level II is an advanced service that some real time quote providers offer. It is an added expense. What this tool shows you are all the market makers bidding for a stock at what price, and the likely size they are looking for. It is only for NASDAQ stocks. For example take Amazon.com in a hypothetical situation. For every market maker bidding for stock you will see their symbol (e.g. Nite for Knight Trimark or Best for Bear Stearns etc). Assume that there are five high bidders at 100, and they are looking for 10000 shares in total. Once all the stock they are bidding for is done a market maker will raise their bid to 100 1/4. This screen gives the trader a good view as to how strong or weak a stock looks at a given time. If there is 4 bidders at a price and only one seller the propensity for that stock to go up is fairly high. In contrast, if there is only one high bidder at a price and 5 offers, the propensity for the stock to go down temporarily is good. Remember this is only a simple answer and some direction to your question, it is quite a bit more detailed than this, however if you are a trader, it gives you great insight of behind the scenes action.

For a further explanation, go to http://www.tradescape.com

I was thinking about shorting an IPO, but my broker said I couldn't. Why not?

SEC rules prohibit shorting or margin on all IPOs in the first 30 days. Shorting an IPO will get you into legal hot water. A short or margin order should be automatically rejected by your e-broker. But if it is accepted and executed, you're in big trouble. Don't even try!

What is a DPO?

A Direct Public Offering. This is a form of IPO that is offered directly by the company rather than a company using an investment bank (underwriter).

Why isn't a DPO available in my state?

States have had securities laws (known as blue-sky laws) to protect residents from shady investment schemes for a long time. The laws vary from state to state and can be very detailed in limiting offerings. This is probably one reason why companies use investment banks (registered and qualified in every state) to underwrite securities offerings.

A Direct Public Offering would probably have to qualify under a state's blue-sky laws in order for residents of that state to buy directly from the company. My guess is that your state has more stringent blue-sky laws than those listed.

Interesting Articles to Note

The ABCs of IPOs
By Yi-Hsin Chang (TMF Puck)
(3 part series)
http://www.fool.com/Specials/1999/sp990316AboutIPOs.htm

Off the Beaten IPO Path
By Rick Aristotle Munarriz (TMF Edible)
http://www.fool.com/features/1998/sp980707IPOShenanigans.htm

The ABCs of IPOs: Playing the Game
By Darren Chervitz, CBS MarketWatch
(4 part series)
http://cbs.marketwatch.com/news/archives/ipo97/ipo_abc4.htx?source=htx/http2_mw

The Risks of Trading Online
By Mark Schwanhausser, Mercury News
http://www.mercurynews.com/business/top/017081.htm

For a glance at all the IPOs this year, how they did at launch and where they stand now, go to http://www.ipo-fund.com/priced.htm

Which broker should I use?

These are some of the brokers that people on this board use. This is not a complete list of brokers that offer IPOs. The information is provided ONLY as a guideline for helping you select a broker. YOU are responsible for selecting the broker that fits your needs using YOUR research. This information may not be 100% accurate. Objects in mirror may be closer than they appear. This tag may not be removed under penalty of law. Don't eat yellow snow. Get the idea how this works?

Charles Schwab http://www.schwab.com
Holding period: 30 days
$25,0000 minimum balance + 24 trades/year or $500,000 minimum balance
***Requires enrollment in Schwab Signature Gold Service™
***IOI can be submitted via internet or phone
***Currently does not have functionality to check status or make cancellations online

Discover Brokerage http://www.discoverbrokerage.com
Holding period: None, but flipping is discouraged.
$100,000 minimum balance

DLJDirect http://www.dljdirect.com
Holding period:
$100,000 minimum balance

E*Trade http://www.etrade.com
Holding period: 30 days
$2000 minimum balance

Fidelity http://www.fidelity.com
Holding period:
$500,000 minimum balance or Enrollment in Fidelity Premium Services or qualify for Active Trader or Gold Circle commission schedules.

Wit Capital http://www.witcapital.com
Holding period: 60 days (5% commission for disposing of an IPO early)
$2,000 minimum balance

WRHambrecht http://www.openipo.com
Holding period: None
$ no minimum balance



Updated 12/3/99
(but I can't take credit for the writing)

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