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30 Terms Every IPO Trader Should Know

AvatarBen Sturgill ·

While many beginner traders head into the IPOs, thinking it’s an easy cash grab…  experienced IPO traders do their homework — only taking trades that fit their criteria—and are lasered in on the price action.

There’s a simple way to cut the IPO learning curve down —so you can be prudent and build a strong foundation.

As a former pro basketball player, the one thing I learned was that you can never be too prepared for any opponent. That meant knowing the ins and outs of the other team… their strengths and weaknesses.

That’s directly translated to my trading.

I love to go into the opening day of an IPO knowing exactly what the company does, the terms of the deal, and other intricacies of the stock.

The thing is… I realized when I first started looking into IPOs, there were so many terms I never even heard of before — and that always left me lost in translation.

However, I remained disciplined and laid out a solid foundation, brick by brick — as I learned the lingo and furthered my evolution into an IPO expert.

I want to provide you with that same foundation so you can start exploring the sea of opportunities in the IPO market.

That said, I want to get you familiar with some of the terms and concepts I will be discussing in our future exchanges.

 

Familiarize yourself with the lay of the land

 

When you’re trading IPOs or just reading about them for your leisure, you’ll hear a lot of random terms thrown around. More times than not, the beginners who read about the unicorns will just skim… get stumped by a word and move on.

The thing is, with IPOs… these terms are there for a reason, they give us clues to how we should trade them — today, I just want to get you familiar with some IPO lingo.

That said, I want to provide you with some of the most important terms I’ve come across throughout my career that will get you up to speed about some of the most exciting stocks out there.

You’ve probably come across headlines about IPOs before…

 

Source: MarketWatch

 

That percentage performance is known as the aftermarket performance. Basically how well the stock performed against its offering price.

Allotment is something you’ll come across ahead of an IPO and lets you know the number of shares an underwriter gets allocated.

American depositary receipt (ADR) is a term you might see on the ticker of an IPO or on a news article and that indicates it’s a foreign company traded on the U.S. stock exchange. For example, Spotify (SPOT) and Alibaba (BABA) are considered ADRs.

You might hear a talking head mention the IPO has a strong balance sheet. This means the company is financially sound (at a certain point in time), and it’s included in a company’s prospectus — often a powerful tool I use to analyze a company.

If you hear traders say there’s a big block — that just means there’s a large amount of stock (10,000 shares or more).

broken IPO simply means the stock was weak on opening day, and its share price fell below the offering price.

 

Source: Barron’s


Calendar (also known as pipeline) lets us know exactly what’s on the docket in terms of IPO stocks (including the lockup period, quiet period, and issue date). This is one of the most powerful tools I use in my trading.

 

 

Most IPOs offer common stock as it’s the most basic form of ownership in a company. One share of common stock represents a percentage of the company, and each share may have a vote (if they’re voting shares).

The cooling-off period is the time between the date a company issues its preliminary prospectus and its issue date. Basically, the underwriter and the company must remain quiet, generally lasts between 20 days.

Date of issue is the first day the IPO trades, also known as opening day or issue date.

Direct public offering (DPO) is something we’ve seen companies do more recently Slack (WORK) and Spotify (SPOT) to go public. Basically, when a company conducts a DPO, they sell shares directly to the public without using an investment bank.

It’s risky business for sure because they cannot control the demand in case there are sellers.

EDGAR is the one place that you can look for filings from companies about to go public. It’s free and easy to use. It’s something I always turn to when I’m trying to research a new IPO.

You could probably guess flipping means taking a quick profit when an IPO pops.

The float gives us an idea of how much supply is out there for market participants to trade.

When a private company conducts an IPO, we say it’s “going public”.

hot issue is an IPO that skyrockets and trades at a premium to its offering price (think Beyond Meat).

IPO (Initial Public Offering) specifically means its the first time ever a company is selling its stock to the public. The money raised from the IPO could directly goes to the company so it could expand its operations… or it could pay off existing shareholders — or a combination, it all depends on the details of the prospectus.

Insider is someone who is close to the company. They could be a director, executive, and officer, or a shareholder who owns 10% or more of a company. In terms of the IPO world, these are the players we care about because they can affect the stock price.

Lead underwriter is the investment bank who runs the show for an IPO. Typically, you’ll see a big-name investment bank, such as Goldman Sachs or Morgan Stanley lead an IPO. Basically, they decide the price of an IPO, the number of shares to be sold.

Lockup period is one of my favorite things to hear. Basically, the lockup restricts insiders from selling shares for 180 days (typically) after a company goes public. After that, we see profit taking and sellers flood the market, uncovering an IPO payday for us.

Nasdaq is a stock exchange without a physical trading floor, and many companies go public on it. Typically, these IPOs may be a bit more volatile.

NYSE (New York Stock Exchange) is another exchange companies like to go public on, and is thought to be more stable in terms of the aftermarket performance.

Offering price is the price that the lead underwriter selects for the IPO, generally the night before a company is expected to debut. This is the price that the high net worth individuals and institutions can purchase the stock for.

The opening price (also known as the first trade price) is the first price at which an IPO starts trading on the market. Generally, this price will be above the offering price.

Oversubscribed gives us an idea of where the demand is for an IPO. This indicates an IPO has more buyers than there are shares. This is a sign that the IPO will most likely trade at a premium when it opens.

Preliminary prospectus (red herring) is filed with the SEC prior to the finalized prospectus. It’s known as the red herring because there is red text and indicates that some of the information is subject to change.

This gives us a heads up about an IPO and provides us with an edge to get up to speed before the actual prospectus hits the market.

The prospectus is probably the most important document for an IPO. It tells investors everything they need to know about an IPO, the risk factors, financials, how they’re going to be using the proceeds, as well as their plans for the future.

The quiet period prevents management from hyping up an IPO and manipulating the price. This period typically lasts around 40 days after the stock starts trading.

Selling stockholders are the players who sell their positions after the lockup expiration date and could be an indication that a company is weak.

Undersubscribed tells us there is weak demand for an IPO and may signal a broken IPO.

Learning about the IPO terms is one of the easiest ways to familiarize yourself with some of the most-talked about stocks on Wall Street.

With the basics out of the way, I look forward to sharing some of my best ideas about IPO trading with you.

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