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What is a Hot IPO?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 09 April 2018
  • Copyright Protected:
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    Conjecture Corporation
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A hot IPO is an initial public offering eagerly anticipated by investors. This often leads to over-subscription, a situation where demand for shares exceeds availability, and when the shares go on the open market, the stock price can rise very rapidly. Underwriters supervising a hot IPO reward valued customers and clients with early opportunities on hot IPOs. People who manage to invest early can potentially reap a large profit from their shares, as long as they judge market movements correctly.

The dot com boom in the 1990s led to a flood of hot IPOs in financial markets all over the world. Many online companies used initial public offerings to raise capital for their operations and relied on the giddy atmosphere that surrounded such offerings to drum up interest in their shares. Underwriters could use a variety of promotional techniques to market offerings they were supervising with the goal of getting investors excited, and a hot IPO could practically market itself in some cases.

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When an underwriter manages to sell out an entire initial public offering, it is said to be in a situation where “the pot is clean.” There are, in other words, not even scraps left behind for investors interested in shares. For underwriters, this is a very favorable position. Underwriters receive a discount on their shares and stand to make a large profit from an IPO. In the case of a hot IPO, they can recoup their investment quickly. Well positioned and marketed IPOs are sometimes a matter of luck, and sometimes a matter of skill on the part of the underwriters, in terms of timing and managing the IPO.

As some investors learned to their chagrin, a hot IPO does not always continue to succeed. After the initial rush of interest and rapidly climbing stock value, the value can level off. Failure to perform on the part of the company can result in a fall in values as investors start to sell off their stock with the goal of getting out of their investments before they start taking losses. Some dot coms engaged in initial public offerings without clear business plans in mind and investors took a hit on their stocks as the market began to realize that the companies would have difficulty moving forward with research, development, and marketing.

People can track upcoming IPOs in financial publications, many of which cover hot IPOs in detail. This coverage can be used to make an informed decision about a proposed stock purchase. Evaluating what the company does, looking at the prospectus, and seeing who is involved in management of the company, as well as the stock offering, can provide important information about the future direction of the stock's value.

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