Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 198

preliminary prospectus is published and circulated by the underwriter to attract potential investors. This prospectus usually has red margins and therefore it is sometimes referred to as the red herring.

By the end of the IPO process the company and the underwriter should be in agreement on the IPO price (i.e., at what price the shares will begin trading), the effective IPO date, the stock symbol, and the exchange where the stock will be traded (NYSE, NASDAQ, etc.). Then the stock begins its trading on its chosen stock exchange, and if the investors happen to like the stock its value may rise right out of the gate. In other cases, the stock may not see a spectacular reaction, or its price may even drop below the IPO price. It all depends on the market's mood. The company then having collected the capital raised by the IPO hopefully goes about wisely using the money to become prosperous. Remember that the company only collects at the IPO price that it has sold to the underwriter or the large investors. Once the stock begins trading, the company has no ownership of the outstanding shares anymore. They are now owned by the investors.

In the late 90s many stocks (especially those in the technology and Internet sectors) soared during their IPO days, some doubling, tripling, quadrupling, or even quintupling in just a few seconds or minutes after the opening. Unfortunately this left little or no time for the average investor to get in and buy the shares at a reasonable price.With the IPO market cooling off in 2000, this is not as big of an issue as it used to be. However, quality companies still see their share values rise rapidly from their IPO prices. For this reason, in my opinion, if you can't get in on an IPO through your broker, do not rush in to buy the shares on the first day, especially if they have risen irrationally.Wait a few days before jumping in. Chances are that the stock will cool off and then you can buy at a lower price. My other opinion: don't get obsessed with IPOs.


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