All You Need To Know About Initial Public Offering Or IPO (Part 3 of 5)
( continued…)
IPO Part 3 of 5 : Underwriters and Roadshow
How do underwriters make their money?
1. A bank or group of banks put up the money to fund the IPO and ‘buys’ the shares of the company before they are actually listed on a stock exchange.
2. The banks make their profit on the difference in price between what they paid before the IPO and when the shares are officially offered to the public.
What part of an IPO is a road show?
1. To try and drum up interest in the IPO, the underwriter takes the prospectus and presents it to prospective investors. This is what’s called a road show.
2. These can be trips around the world—thus the name road show—or can be video or internet presentations.
3. If a prospective investor likes the IPO, underwriters can legally offer them shares at the price they eventually set before the stock is listed on an exchange. This is called IPO allocation.
4. Road shows are usually for the bigger institutional investors like pension funds, rather than an individual investor.
How is the price of the IPO stock determined?
1. As the IPO date comes closer, the underwriter and company decide on the price.
2. This can depend on the company, the success of the road show and current market conditions.
How do investors get in on an IPO?
1. For small investors, it’s nearly impossible to get any kind of IPO allocation.
2. They usually have to wait until the stock is listed on an exchange, unless they have a very large account with the bank or banks doing the underwriting. Only then would they be offered some shares.
3. Many market experts say that the small investors should wait and refrain from immediately buying shares of an IPO. That’s because insiders, such as hedge fund managers, are buying up shares that push up the price.
4. Smaller investors are advised to wait a couple of days for the stock price to settle back down.
( look out for IPO Part 4 of 5 )
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