So, Facebook is finally going public in a big flashy IPO and as of Friday 18 May retail investors will be able to trade it, but will they be able to make money from it, or is this just a chance for the private shareholders to cash in?
A look back at some of the highest profile IPOs of the last decade indicates there are opportunities to make money trading for those who know the rules and are prepared to trade on both sides of the market.
Companies around the world go public all the time, but only a few capture the imagination of the street, the media and the general public. Demand for a piece of the action can outstrip the supply of the shares available through the IPO, leaving a pool of individual investors and traders waiting to purchase shares in the open market. This often drives large opening price spikes but do they leave room for anyone else to make money?
To answer this question, I looked at post IPO trading for eight major companies that debuted in the last decade, four from the technology sector and four from other industries. The list included Google, Baidu, Groupon, LinkedIn, MasterCard, Visa, General Motors and Tim Hortons.
Results from the first day of trading showed that most of the gains occurred right at the open, favouring those who were in on the IPO over those buying in the open market.
Baidu had by far the best opening day performance, rising 85 per cent off the opening price. MasterCard and LinkedIn also had strong debuts, both closing approximately 14 per cent above where they opened. Google opened 18 per cent above its IPO price, then basically held steady through the day.
Initial gains can be fleeting though as half of the stocks finished their first day down from their opening price.
The technology IPOs with big price spikes on their open tended to fall back sharply in the two to three weeks following their debut. The non-technology IPOs tended to not spike as much on their opening day and then tended to consolidate for the next couple of weeks. After about a month, both groups of stocks tended to regain their footing and advance.
The reason for this post IPO dip is that after the initial flurry of demand is met, interest tends to drop off for a bit. At the same time, supply increases as those with profits from the IPO start to take trading profits.
This dip also coincides with the regulatory mandated post-IPO quiet period which is 40 days in the US. After about a month post-IPO stocks tend to start advancing again which can be attributed to the lifting of research blackouts and the release of the company’s first earnings report, which enable the underwriters to drum up interest in secondary market trading.
Performance of previous high-profile internet related IPOs suggests that in Facebook’s case we could see a major spike-off at the the open and perhaps even strength through the first day of trading. We could then see a retreat through the rest of May and the most of June with the potential for an advance in late June or early July as analysts are cleared to publish research and the company’s first earnings report approaches. This could also coincide with common stock market seasonal trading swings.
By Colin Cieszynski, senior market analyst at CMC Markets
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