That's the system as it's currently implemented, yes. Underwriters have some folks on tap that they'll let in on the IPO. IOW, folks that'll dump money into the IPO. But those folks aren't suckers, they'd like to see a return on their investment, if not individual investments then at least in aggregate. So, in summary:
1. Companies want someone to buy their new shares.
2. Brokerages have such folks on tap.
3. However, those investors wants a return.
4. So the underwriters set the IPO price a bit low so as to increase the chances of investors getting that return, which means those investors will come back next time for, say, pets.com's IPO.
I doubt this is written down anywhere, but that's the impression I get from observing IPOs (tech and non-tech) for 20 years or so.
If it was done on the highest price - then those investors who are buying after IPO would have put in bids in the IPO and there wouldn't be a pricing gap.
- For better or worse, a pop is seen as a successful IPO. A lot of the market is about expectations and if you have an "unsuccessful" IPO you are going to get good press.
- Underwriters are selling to the same institutional investors over and over. They're going to promise those investors that there will be a reward for getting in on this IPO. If an underwriter sells a bunch of IPOs that don't go anywhere they are going to have trouble continuing to underwrite
The first point amounts to one good press cycle. You can get that other ways and the lasting value of a single cycle of fluffed up good press based on underwriters and their cronies making money on their shares is nil.
The second is entirely the underwriter's problem. A company only IPOs once; there's no reason for them to take a hit to help the underwriter and friends make money for no reason. The underwriter takes a cut and a fee regardless.
Think of it as an additional cost of underwriting just broken out in a weird way and it might be more palatable.
If you want a lot of interest in your IPO then you probably need underwriters with big institutional relationships. The underwriters with the best relationships are going to be the ones who help their clients get good returns. You're just paying for better underwriters by losing part of the pop instead of paying them fees directly.
Companies are free to go to smaller underwriters in exchange for an IPO price that's closer to what the underwriter thinks the market will bear. And yet most of them choose not to.
Given that almost every IPO has a pop, what do you think is most likely
* CEOs & VCs taking their companies public don't realize that they are leaving money on the table by underpricing the IPO. You have two groups of sophisticated finance people and the underwriting side always manages to fleece the company going public.
* There are structural reasons and incentives for creating an IPO pop
You can't even accuse people of trying to fleece the low-level employees and retail investors. The employees are locked up either way and whether you have a pop or not, by the time the shares reach the retail investors they're the same price either way.
If you IPO at 24 and it jumps to 32, hopefully it is still 30 when you can sell. If you IPO at 32 and it drops to 26 cause there is no buzz, you make a lot less when you sell.
That said, the goal is for shares to have a nice upward pop when they hit the open market.
This helps encourage a broader based of shareholders, protecting against the case where a big shareholder decides to dump all of their shares.
This also helps in the case where the company comes out with bad news in the near future. Shareholders who make money are less likely to sue.
Auctions can work pretty well for pricing things.
I didn't go in that big, but we will see. I bought 700 shares at $29.12, sometime around noon. I was a bit busy so didn't pay much attention to this thread, but they closed at a bit over $32.00.
I haven't yet set a mark to sell them. I do have it set to notify me I'd they go below 29.00 and will sell them all if they go below $24.00. Ideally, I'll keep the shares for a full year, at minimum.
I figured 20k isn't too much to risk, though I technically risk less than that because I will sell if they go below $24.
So, we shall see... We shall see... It is one of the rare times when I am betting against the folks on the tech forums. The commentary seems to be largely negative, concerning the software itself - I've never personally used it. I'm betting that the hype train will continue, regardless of it not being perfect in every way.
I do another one and someone told me there's a technical name for it. I forget the name.
When I go shopping, I'll discretely look in shopping carts. I'll make a mental note and check to see how well the shelves are stocked in comparison to other products. If I see a lot of the same company in carts, to the point where the store hasn't matched stocking well, then I'll look further into the parent company.
So far, it has done well. I'd never played in the market before and my 401k was always managed. So, this is pretty new for me. I've been at it since maybe 2011.
I did the same thing with Tesla, though they were $24 at the time.
I've written about this before, here in HN comments. I often make stock choices based on the commentary at sites like Slashdot and HN. No, I don't listen to people saying to sell or buy, I listen to the hype and commentary about the companies themselves. As another example I did well with Yahoo!
To be clear, this isn't serious money. I have someone who professionally manages my finances. This is more an experiment and is meant to to play around.
I know, that probably sounds a bit terrible. But, it's not money I am worried about losing and I'm actually doing pretty good at speculating. I make greater returns than the person who does it for me - which is to be expected. I take a bunch of risks, don't do traditional research, and don't even check the daily prices.
That way, I can change my mind if, for some reason, I think it will rally.
An IPO that goes up instead of down is much more likely to attract more investment thus driving the founder's remaining shares up.
I see it as the founders needlessly missing out on 30% of money (in this case), which ends up going in the pockets of the Wall Street middle men that get first access to the stock offering.