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Are you talking about the geeks at Tesla or the geeks who bought stock after the price jumped? If the former, companies often IPO at prices below what they're

Are you talking about the geeks at Tesla or the geeks who bought stock after the price jumped? If the former, companies often IPO at prices below what they're worth--if the IPO is issued at a fair price, then it's Tesla that benefits, not the speculators. If the latter, buying stock because it's going up is an act of speculation, not necessarily geekishness.

eru 16y ago
Yes, I don't really get why any company would IPO below their fair price. Every time I see a company's stock go up massively on the first day, I ask me "Why did they not charge a higher price for their stock in the first place?".
- dantheman 16y ago
  They don't sell all of their stock at the initial price, but sell it later at the higher prices.
  - eru 16y ago
    OK. But still, why sell even some of the stock lower than necessary? Or does the excitement created pay off in the longer term?
- lkrubner 16y ago
  Leaving money on the table during an IPO is often attacked as a form of fraud. I recall it was a big issue during the peak of the Internet boom, 1997-2000. There you had a lot of startups desperate for money to fund their growth, and yet they gave away substantial amounts of money to speculators. There were clear abuses of "Friends and Family" blocks of stock -- these started getting handed out to anyone who could move the deal forward, with the understanding that the stock could be dumped on the opening day of trading. This amounted to a kind of bribe, an additional payment made in excess of all the normal IPO fees. Wikipedia offers this: http://en.wikipedia.org/wiki/Initial_public_offering http://en.wikipedia.org/wiki/Initial_public_offering "The underpricing of initial public offerings (IPO) has been well documented in different markets (Ibbotson, 1975; Ritter 1984; Levis, 1990; McGuinness, 1992). While Issuers always try to maximize their issue proceeds, the underpricing of IPOs has constituted a serious anomaly in the literature of financial economics. Many financial economists have developed different models to explain the underpricing of IPOs. Some of the models explained it as a consequences of deliberate underpricing by issuers or their agents. In general, smaller issues are observed to be underpriced more than large issues (Ritter, 1984, Ritter, 1991, Levis, 1990) Historically, IPOs both globally and in the United States have been underpriced. The effect of "initial underpricing" an IPO is to generate additional interest in the stock when it first becomes publicly traded. Through flipping, this can lead to significant gains for investors who have been allocated shares of the IPO at the offering price. However, underpricing an IPO results in "money left on the table"—lost capital that could have been raised for the company had the stock been offered at a higher price. One great example of all these factors at play was seen with theglobe.com IPO which helped fuel the IPO mania of the late 90's internet era. Underwritten by Bear Stearns on November 13, 1998 the stock had been priced at $9 per share, and famously jumped 1000% at the opening of trading all the way up to $97, before deflating and closing at $63 after large sell offs from institutions flipping the stock . Although the company did raise about $30 million from the offering it is estimated that with the level of demand for the offering and the volume of trading that took place the company might have left upwards of $200 million on the table." All the same, Wikipedia also offers a charitable explanation for the phenomena: "The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, if the stock falls in value on the first day of trading, it may lose its marketability and hence even more of its value."
  - ct4ul4u 16y ago
    The term "pop" is sometimes used to describe the immediate post-IPO jump. A small amount of "Pop" (no more than 10 percent) isn't a bad thing. It is a result of oversubscription, which every underwriter needs in order to assure they aren't left holding the bag. It also makes stabilization (the only legal form of market manipulation) less expensive for the underwriter. You're going to see more extreme cases of "pop" in a market with a lot of uncertainty (like we have now). This is the underwriter being cautious. Their worst case scenario doesn't appear and the IPO turns out to be underpriced. What we saw in the late 1990's was heinous. I worked at a startup investment bank (Epoch Partners) that was intended to take some of the pop out of IPOs (and make allocation more available to genuine retail investors). -r
    - eru 16y ago
      Yes, but why care about underpricing at all? Can't you just have a formal auction, where everybody states (legally binding) how many stocks they want at which price level (e.g. for 3$ I'd buy 10 stocks, for 5$ I'd buy only 8 stock, and so on, basically giving your demand function) and then do a simple optimization that finds the highest price at which all shares sell. (Or alternatively, and perhaps better, the lowest price at which everybody who wants to pay at least this price, can buy.) Why rely on guess work? Edit: I saw on the linked Wikipedia article that some people have tried auctions. Google seemed a noteworthy example.
      - ct4ul4u 16y ago
        Epoch had an auction equivalent process (which we didn't get to implement because we didn't get to the point of being lead underwriter).
- lkrubner 16y ago
  In general, the occasional underpricing could be dismissed as a mistake, but when there is a sustained pattern of it, you have to wonder if the underwriters of the offering are not trying to thicken their profits by opening the door to further speculation of their own.

eru 16y ago

Yes, I don't really get why any company would IPO below their fair price. Every time I see a company's stock go up massively on the first day, I ask me "Why did they not charge a higher price for their stock in the first place?".

dantheman 16y ago
They don't sell all of their stock at the initial price, but sell it later at the higher prices.
- eru 16y ago
  OK. But still, why sell even some of the stock lower than necessary? Or does the excitement created pay off in the longer term?
lkrubner 16y ago
Leaving money on the table during an IPO is often attacked as a form of fraud. I recall it was a big issue during the peak of the Internet boom, 1997-2000. There you had a lot of startups desperate for money to fund their growth, and yet they gave away substantial amounts of money to speculators. There were clear abuses of "Friends and Family" blocks of stock -- these started getting handed out to anyone who could move the deal forward, with the understanding that the stock could be dumped on the opening day of trading. This amounted to a kind of bribe, an additional payment made in excess of all the normal IPO fees. Wikipedia offers this: http://en.wikipedia.org/wiki/Initial_public_offering http://en.wikipedia.org/wiki/Initial_public_offering "The underpricing of initial public offerings (IPO) has been well documented in different markets (Ibbotson, 1975; Ritter 1984; Levis, 1990; McGuinness, 1992). While Issuers always try to maximize their issue proceeds, the underpricing of IPOs has constituted a serious anomaly in the literature of financial economics. Many financial economists have developed different models to explain the underpricing of IPOs. Some of the models explained it as a consequences of deliberate underpricing by issuers or their agents. In general, smaller issues are observed to be underpriced more than large issues (Ritter, 1984, Ritter, 1991, Levis, 1990) Historically, IPOs both globally and in the United States have been underpriced. The effect of "initial underpricing" an IPO is to generate additional interest in the stock when it first becomes publicly traded. Through flipping, this can lead to significant gains for investors who have been allocated shares of the IPO at the offering price. However, underpricing an IPO results in "money left on the table"—lost capital that could have been raised for the company had the stock been offered at a higher price. One great example of all these factors at play was seen with theglobe.com IPO which helped fuel the IPO mania of the late 90's internet era. Underwritten by Bear Stearns on November 13, 1998 the stock had been priced at $9 per share, and famously jumped 1000% at the opening of trading all the way up to $97, before deflating and closing at $63 after large sell offs from institutions flipping the stock . Although the company did raise about $30 million from the offering it is estimated that with the level of demand for the offering and the volume of trading that took place the company might have left upwards of $200 million on the table." All the same, Wikipedia also offers a charitable explanation for the phenomena: "The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, if the stock falls in value on the first day of trading, it may lose its marketability and hence even more of its value."
- ct4ul4u 16y ago
  The term "pop" is sometimes used to describe the immediate post-IPO jump. A small amount of "Pop" (no more than 10 percent) isn't a bad thing. It is a result of oversubscription, which every underwriter needs in order to assure they aren't left holding the bag. It also makes stabilization (the only legal form of market manipulation) less expensive for the underwriter. You're going to see more extreme cases of "pop" in a market with a lot of uncertainty (like we have now). This is the underwriter being cautious. Their worst case scenario doesn't appear and the IPO turns out to be underpriced. What we saw in the late 1990's was heinous. I worked at a startup investment bank (Epoch Partners) that was intended to take some of the pop out of IPOs (and make allocation more available to genuine retail investors). -r
  - eru 16y ago
    Yes, but why care about underpricing at all? Can't you just have a formal auction, where everybody states (legally binding) how many stocks they want at which price level (e.g. for 3$ I'd buy 10 stocks, for 5$ I'd buy only 8 stock, and so on, basically giving your demand function) and then do a simple optimization that finds the highest price at which all shares sell. (Or alternatively, and perhaps better, the lowest price at which everybody who wants to pay at least this price, can buy.) Why rely on guess work? Edit: I saw on the linked Wikipedia article that some people have tried auctions. Google seemed a noteworthy example.
    - ct4ul4u 16y ago
      Epoch had an auction equivalent process (which we didn't get to implement because we didn't get to the point of being lead underwriter).
lkrubner 16y ago
In general, the occasional underpricing could be dismissed as a mistake, but when there is a sustained pattern of it, you have to wonder if the underwriters of the offering are not trying to thicken their profits by opening the door to further speculation of their own.