3 ms·

Regarding your first paragraph about directly owning shares for themselves and for clients. That means they are also incentivized to underprice the shares so th

Regarding your first paragraph about directly owning shares for themselves and for clients. That means they are also incentivized to underprice the shares so that they can make a bigger profit. They get to buy in at a lower price and sell at a higher one.

LatteLazy 6y ago
Yes, that's correct. This is why the vast majority of IPOing shares RISE in price early on. Partly this is countered by the competition between banks, if Morgan Stanley tell you they can IPO you at 50usd but Jefferies say 55usd, you go with Jefferies. It's also good news for anyone who continues to hold equity (CEOs, founders, early/angle investors etc). Only the initial equity sold goes at this discount. For this reason many companies will start by offering small amounts of equity and later issuing more at the market price. Of course, its also a very hard question to answer: how much is a share of company X worth? When there is no market to reference. So the discount is also a risk premium both for fraud and for mis-valuation. I actually think IPOs are one of the hardest parts of finance to fully understand and to do and so are one of the most interesting. That's not to say that there aren't conflicts of interest and dodgy activity. Just that there are 101 moving parts.
- cinntaile 6y ago
  That makes sense, I hadn't considered the competition between banks. Do you mean issuing more as in diluting the number of shares or by early stakeholders selling off their shares? The reason I ask is because on the public markets diluting shares usually pushes the shares price down, because it means they are in need of capital no? So that implies you mean early stakeholders selling their stakes? Pricing an IPO (or any asset for that matter) is a fascinating topic, at least to a layman like me. It sounds like this should be a perfect fit for some sort of auction, yet that doesn't really seem to be a common strategy. I guess a direct listing is more of an auction type of pricing mechanism.
deleted 6y ago
[deleted]

LatteLazy 6y ago

Yes, that's correct. This is why the vast majority of IPOing shares RISE in price early on. Partly this is countered by the competition between banks, if Morgan Stanley tell you they can IPO you at 50usd but Jefferies say 55usd, you go with Jefferies. It's also good news for anyone who continues to hold equity (CEOs, founders, early/angle investors etc). Only the initial equity sold goes at this discount. For this reason many companies will start by offering small amounts of equity and later issuing more at the market price. Of course, its also a very hard question to answer: how much is a share of company X worth? When there is no market to reference. So the discount is also a risk premium both for fraud and for mis-valuation. I actually think IPOs are one of the hardest parts of finance to fully understand and to do and so are one of the most interesting. That's not to say that there aren't conflicts of interest and dodgy activity. Just that there are 101 moving parts.

cinntaile 6y ago
That makes sense, I hadn't considered the competition between banks. Do you mean issuing more as in diluting the number of shares or by early stakeholders selling off their shares? The reason I ask is because on the public markets diluting shares usually pushes the shares price down, because it means they are in need of capital no? So that implies you mean early stakeholders selling their stakes? Pricing an IPO (or any asset for that matter) is a fascinating topic, at least to a layman like me. It sounds like this should be a perfect fit for some sort of auction, yet that doesn't really seem to be a common strategy. I guess a direct listing is more of an auction type of pricing mechanism.

deleted 6y ago

[deleted]