Tesla Motors IPO, Day 1

What you see on the stock market is actually 2nd hand selling and buying. It is near impossible to secure a block of IPO stock unless you are an institution, or represent someone with enough assets to get the brokers' attention.

I wonder about this as well. Perhaps one of the metrics companies should use when evaluating investment banks is how accurately they price IPOs.

There may be some other intangible value to having the stock jump on the first day. If so, that value had better be larger than <IPO amount> * <% increase> .

The only time they will sell in small quantities is if they can't sell it anywhere else. And if they can't sell it, then you don't want it.

The only realistic way to get in on them is a mutual fund that specializes in them. Or have a lot of money.

This is bringing back a lot of memories of 2001 when this kind of stuff was very very hot. I wonder if that IPO mutual fund still exists.

Also google witcapital - they would buy IPOs then sell them to individuals. As I recall they had a very hard time finding shares. It reached the point that social pressure would force companies to sell at least some to witcapital if they wanted their users to like them.

So about how you get onto the ground floor -- you have to be one of those special people the bank calls. (note that this is the "classic" way things happen, some IPO's, such as the Google one were different).

There have been some accusations that the underwriters use IPOs to make a lot of money in addition to their deserved fees. The accusation is that the underwriting Ibank will sell and IPO to a friendly investor for a very depressed price, so that the friendly investor is guaranteed to make money selling the stock as soon as trading opens. To express his thanks, the friendly investor will then find a way to pay the ibank for its trouble. For example, the friendly investor can use the ibank as a broker for his stock trading, even though the ibank has sky high fees. And of course the victim is the company that does the IPO, which as you said, gets screwed out of a whole bunch of capital, and even worse they end up with a market capitalisation that is much higher than the actual capital and assets that they own, so they will face unfairly high expectation as to their future profits.

This theory was first and best articulated by professor Coffee of Columbia Law School in an NYT article. So if you are curious you can try to do a search (I could not find the article myself). Prof. Coffee is a very smart guy and happened to be my securities law teacher.

The banks of course dispute the theory. The banks' argument is that they need to place the initial shares to their friends and known clients, and they need to have the price somewhat depressed in order to sell all the stock of the offering. Otherwise it would not be certain how much stock they can sell for what price, so they run a risk of having the offering fail (i.e., not sell all the offered shares). If an offering fails it is considered a disaster for the company doing the IPO.

There is however an alternative. It is called a Dutch auction, and in it potential investors bid for the initial shares in an auction. Thus, the proper price can be discovered and it is more likely the offering will succeed. Also, in a Dutch auction much more people can take part in the initial offering.

Google did their offering by dutch auction and it was much easier to get in on the offering for the Google IPO. You just needed to have a brokerage account in one of the banks that did the IPO (and this included most major ibanks) and you could bid for IPO shares. The ibanks were not very happy with Google's choice to do a dutch auction, but they were Google, so the banks did it anyways.

I don't have these types of accounts so I never get pre-IPO allocation, but what I did on IPO day was continuously refreshing the page to catch when it's first open (IPO usually open b/w 10am-12:00). You can almost always buy at lower price than the offer price within the first 15 minutes. Most IPOs (~80%) close lower than the offer price on the first day, and they continue to go down after that, you don't want to touch these. The remaining 20% are hot, and you know they're hot b/c the underwriters keep bumping the offer price up. I only played these and for very short term, from only a few minutes to a few days.

I'd time when the price starts bouncing back after the first 15 minutes, probably b/c more people realizing the stock is opened to the public and buy in, and buy 300-400 shares. After about 20 minutes of insane rising, the price will start to level out. At this point, I'd sell half of the shares to lock in the profit (~5% gain). I'd keep the rest for the next day, if the stock closes lower than open price then it shows weakness, I'd get out and never look at it again. If it's higher, I'd keep it for 2-3 more days.

With this strategy I was able to make a lot more than my day job. There used to be 7-8 IPOs every week, and a couple of those are hot so I was able to test this strategy for awhile. There were weeks that I made 20% on a position just over a few days (if I remember correctly the IPO was STV). There haven't been a lot IPOs since then and I haven't followed the market lately. May be it's time to start watching again.