The primary market is where companies publish their data and offer shares for the first time.
Advantages include:
Limited public data means competitors have less insight into a company’s performance.
Companies can find private placements and investors interested in their shares.
Publicly traded firms share information with institutional investors to gauge interest and opinions.
Roadshows are conducted:
Purpose: to gather insights from potential investors about demand and appropriate share pricing.
Underwriters (investment banks) collect data on investor interest and share price expectations.
Truthfulness in pricing:
Investors are encouraged to provide honest feedback on share pricing for the long-term benefit of market performance.
Shares are often sold to investment banks at a discount:
Example: Company sells shares worth $30 each to the bank for $25.
The $5 difference compensates the bank for its risk and work.
If shares remain unsold, the bank incurs financial responsibility.
IPO pricing example:
If the IPO price is set at $30 and trades at $33 by end of the first day, this represents a 10% increase.
Underpricing is a significant cost to the issuing firm:
The firm receives less than the market price on the first day of trading.
For example, instead of $33, the firm collects only $25, representing a loss due to underpricing.
Transparency of interested investors varies:
Investment banks must navigate how candid investors are about their intentions.
Roadshows aim to clarify investor interest levels.
Discussion of various countries and their IPO environments:
Countries have different average first-day returns; charts may vary in clarity.
Historical data on IPO performance, such as those studied by Professor Jay Ritter, indicates varying outcomes over extended periods.
Example from personal experience:
Investor sold shares of Coinbase at a 10% loss, avoiding a potential 70% loss by holding.
Direct sales option for companies:
Less costly than traditional IPOs, allowing firms to decide based on financial implications.
Direct sales do not impose the same restrictions on selling shares that IPOs may enforce.
Investment banks help navigate regulatory environments and investor behaviors.
Costs associated with IPOs include:
Fees to investment banks
Risks of underpricing
The critical role of investment banks in structuring and advising throughout the IPO process.