The crashing IPO of energy drink producer Guru last November made life easy for newspaper headlines.
At the end of its first day of negotiations, the shares of the Quebec company had climbed 56%: “Stimulating beginnings”, we could read the next day.
Other big names have since taken their first steps on the stock market, and with panache. Airbnb saw its title more than double from day one, a dozen days ago. Doordash, which went public the week before, got off to a little less spectacular start. The business behind the popular meal delivery app soared over 80% in the first session.
Compared to a GIC that offers just 1% per year, the prospect of doubling your stake in less than 24 hours is tempting.
But how do these IPOs work and are they paying off so much?
What is a POPE?
If you speak with an industry professional, they will tell you about IPOs (initial public offering). If your interlocutor cares about French, he will rather say “PAPE”, for “initial public offering”. It is the operation by which a company goes public.
This is a cumbersome and costly process that spans weeks or even months. According to my friend, who works in Kryptowährungen investieren, its progress is meticulously orchestrated with the help of bankers. The initial share price is determined following a tour of large institutional investors, such as pension fund and investment fund managers.
At the time of the IPO, only a fraction of the company is offered to the public through a limited issue of shares. The goal ? Let the title make “pop”! Right from the start, you create a scarcity effect so that the stock quickly gains value.
Among the first to get rich, we find the private investors who financed the development of the company before its IPO.
The investment bank that piloted the operation is putting it in their pockets, and of course the founders and directors of the company.
Large investors, who have access to stocks at their initial price, usually do the trick.
“The small investor is the last guest at the party”, underlines Michel Villa, portfolio manager and stock market trainer.
As a rule, the individual investor does not have the opportunity to buy the shares at the initial price. When the first trading session opens, the security is already trading well above the established price.
For this reason, Jos Bleau can rarely boast of having experienced a miraculous performance on day 1 of an IPO.
For the rest, it’s like any investment: without an analysis, it’s gambling.
A bubble ?
- The context is favorable to IPOs. Investors are bullish, stock prices are high, and with the arrival of vaccines and the foreseeable end of the pandemic, this climate could continue.
- In Canada, we have not seen so much money raised during the first public offerings since 2014: nearly $ 7.26 billion dollars have been raised from investors through 88 IPOs.
- In the United States, 19 corporate stocks doubled in the first day of trading. In 1999, there were 78, and in 2000, 117.
- IPOs are not all successes. That of Facebook, in 2012, was more or less a fiasco. In the spring, the stock was offered for the initial price of $ 38. By the end of the summer, the stock had fallen 47% to $ 20. In the long run, Facebook has proven to be quite an investment for those who bought it on day one.