A Play-By-Play of The IPO Process

By: Wayne Duggan

The stock market is off to a volatile start so far in 2019, but traders are anticipating one of the hottest initial public offering markets in recent memory this year. With companies like Uber, Lyft, Airbnb and others expecting to go public in 2019, here’s a look at how the entire IPO process works from start to finish.

Securing Underwriters and Investors

The first step when a private company wants to go public is for representatives from the company to meet with banks to secure IPO underwriters. Underwriters are the ones responsible for selling IPO shares to public institutional investors at a predetermined IPO price. Wall Street investment banks such as Goldman Sachs, Morgan Stanley, and Credit Suisse often handle the underwriting duties for large IPOs and are typically paid a fee of around 3-5 percent.

Once a team of underwriters is assembled, the underwriters will draft and file a form S-1 with the U.S. Securities and Exchange Commission to get regulatory approval for the IPO. This document will explain the company’s business to the SEC and potential IPO investors and includes information about the company’s business model, its finances and risks investors may face. Companies are allowed to initially file their S-1 document confidentially, so they do not risk revealing potential useful information to competitors.

Once the S-1 document is approved by the SEC, the company typically conducts a road show roughly two or three weeks prior to its potential IPO date. During the road show, underwriters travel to meet with prospective investors and explain the circumstances of the IPO, including the number of shares intended to be sold and the target valuation for the company. Underwriters collect bids from interested investors and will use that list of bids to adjust and narrow the target IPO price range accordingly. It’s during the road show that underwriters get a good sense of the potential demand for shares.

Finishing Touches

One day prior to the first day of trading, underwriters will announce the official terms of the IPO, including the expected price per share and the number of shares sold. This is the time IPO buyers find out how many shares they were able to purchase at the IPO price. IPO buyers often don’t get the full amount of shares they requested.

The day of the IPO, management from the company typically rings the opening bell at the exchange on which the shares will be listed, and the stock begins trading, usually after a bit of a delay as the underwriters finish allocating shares. If underwriters did their job well, the IPO shares will open on the public market at a slight premium to their IPO price. If the premium is too high, the underwriters left money on the table for the company. If the stock trades flat or down, the underwriters have a bunch of angry IPO investors feeling like they got ripped off.

Post-IPO Dates

After the first day of trading, IPO investors are watching for the expiration of the underwriter quiet period. Equity analysts from the underwriting banks are forbidden from commenting on stocks they underwrite for 10 calendar days after the IPO date to prevent them from influencing the share price with ratings, target prices or financial forecasts.

Finally, the last major IPO event is lock-up expiration. Lock-up expiration typically occurs anywhere from three to six months after the IPO date. Until the lock-up expiration date, IPO buyers and company insiders are restricted from selling their shares on the open market. Starting on the lock-up expiration date, millions of shares may flood the market for the first time, potentially generating extremely volatile trading action in the stock.

Investors can find an IPO’s lock-up expiration date in the company’s S-1 filing.

Trading with Lightspeed
Lightspeed provides day traders with all the tools required to help them find success in stock trading, and we have been developing and honing our active trader platform to offer the best possible user experience in the marketplace. With the intuitive interface layouts and institutional quality stock and option scanners, we aim to help traders reach their goals, no matter what their strategy is.

For more information on a professional trading platform with Lightspeed, please call us at 1-888-577-3123, request a demo or to set up an account.

Lime Brokerage LLC is not affiliated with these service providers. Data, information, and material (“content”) is provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lime Brokerage LLC does not endorse, offer or recommend any of the services provided by any of the above service providers and any service used to execute any trading strategies are solely based on the independent analysis of the user.

You may also be interested in...

The Stock Market: March Madness Edition
Read More
The IPOX® Week, March 18, 2019
Read More
Investing Lessons We Can Learn From The NCAA Tournament (Part 2)
Read More
The IPOX® Week, March 11, 2019
Read More

Try the demo

Compare Platforms
Check the background of this firm on FINRA's BrokerCheck

Our website uses cookies to improve the performance of our site, to analyze the traffic to our site, and to personalize your experience of the site. You can control cookies through your browser settings. Please find more information on the cookies used on our site in our Privacy Policy. By clicking OK, you agree to allow us to collect information through cookies.

OK