Trading IPOs – What to look for

IPO = Initial Public Offering. If the company has never issued shares to the public directly, it is known as an IPO.

I particularly like the IPO plays and made some serious money from them. I own and opeate a Venture Capital business which helped many tech companies in Europe that eventually floated them in the UK’s AIM and also ISDX markets.

So What to look for in a successful IPO:

Timing

Timing of the IPO is everything. If you have a company that sells a fantastic product but currentrly there is no market place for it then that IPO is doomed. We have seen early cloud service provider IPOs with great products that came to nothing because the time was not right. The people were not using cloud services and did not know what cloud actually is. So ‘Timing’ and market acceptance and knowledge is the key to a successful IPO.

Market Leader

Most successful IPO companies are already market leader in their sector. The niche sectors tend to be performing better. If the company is already struggling with the competition and not the market leader or shortly becoming a market leader than it will be a good short after the initial run (if there is any)

Board of Advisors, Agents and Underwriters

The companies with strong board of advisors and IPO agents tend to do better because they know how to sell their offering. Always check who the advisors are and their performance.

Market Conditions

Altough it is not always the case, if the first day of the IPO is on a bad market day, the growth of the stock can be limited. Think about the market psychology…

The First Trading Day – What to look for

The very first day of the IPO is the most raw form of the stock price. There are no historical charts to look for, there are no resistance or support values, there are no short interest (yet) – basically this is when intraday technical analysis becomes most valuable. There are number of important factors that will affect the price on the first day. The most importants are the number of shares offered to the public (float) and the valuation range of the given company. The smaller the float  the more volatile the price will be. This is a simple supply and demand equation. If an IPO is priced relatively conservatively (i.e. below or similar to other companiues from the same sector with the same size), demand could be higher, and vice versa. Based on the actual demand in the marketplace, the IPO price can also be raised or lowered in the days leading up to the offering.

One of the biggest advice I can give you is: ‘NEVER CHASE!’. Only pay for what you think its worth not the other way around.

In the first day trading, I generally look for a range to form after the initial 15-20 minutes. This enables me not to clash with the early investors (the ones that bought pre-IPO and they now might empty the tank!). So after the first 15 min, if the price is holding, it is almost always a very positive sign.

Once we have more data on the charts and range starts to form, I start to use my own technical analysis on 1 minute and 5 minute charts with extreme risk management (expect volatility).

Don’t forget, if you are chasing an IPO just for the sake of it or because of the hype, you might pay big for it. Always have a plan before going into an IPO trade (in fact in any trade) and execute your own plan and don’t let others to decide the price for you.

I hope this helps

MT

For Information: Top Ten Global IPOs (From Investopedia)

1. Alibaba Holdings Group (NYSE:BABA), a diversified online ecommerce company based in China, went public on September 18, 2014 at a whopping $21.8 billion. Four days later, underwriters exercised an option to sell more shares, bringing the total IPO to $25 billion. Although technology companies traditionally list on NASDAQ, Alibaba chose the New York Stock Exchange for its debut and used underwriting primarily from Credit Suisse.

2. ABC Bank, otherwise known as the Agricultural Bank of China (listed on the Shanghai Stock Exchange and the Hong Kong Stock Exchange), is one of China’s five largest banks. ABC Bank went public on July 7, 2010 at an initial offering raising $19.228 billion. The follow-on greenshoe offerings from underwriter Goldman Sachs Asia brought the total to over $22 billion.

3. ICBC Bank, or Industrial and Commercial Bank of China (listed on the Shanghai Stock Exchange and the Hong Kong Stock Exchange), went public on October 20, 2006, fetching a total of $19.092 billion. At that time, ICBC Bank was the largest mainland Chinese bank and the third large Chinese bank to go public.

4. NTT DoCoMo (NYSE:DCM), a Tokyo‑based telecommunications player, went to the public market on October 22, 1998, raising $18.099 billion. Underwritten by Goldman Sachs Asia, this IPO launched NTT to the third largest market cap for a Japanese company.

5. Visa Inc. (NYSE:V) rounds out the top five. This debit and credit card processing company entered the public market on March 18, 2008, and raised $17.864 billion—no small feat during a global financial crisis. It is the largest IPO for any U.S.‑based company.

6. AIA (OTC:AAIGF), a Hong Kong-based investment and insurance company, was offered to the public on October 21, 2010. It raised $17.816 billion and become the third Hong Kong-based financial company on this top 10 IPO list.

7. Enel S.p.A.(OTC:ENLAY) listed on the New York Stock Exchange on November 1, 1999 after it raised $16.452 billion. This Italian company competes in the gas and electric market in Europe and the Americas. It is the only utility company on the top 10 IPO list.

8. Facebook (NASDAQ:FB) was one of the most-hyped IPOs in history. It listed on May 1, 2012 and raised $16.007 billion. This social media technology company’s launch was riddled with trading issues and questionable information-sharing accusations. Nevertheless, it still became the largest technology IPO in U.S. history.

9. General Motors (NYSE:GM) debuted on November 17, 2010 after emerging from a bankruptcy filing one year earlier. This U.S.-based car manufacturer raised $15.774 billion in its initial public offering.

10. Nippon Tel (NYSE:NTT) is a Tokyo-based telecommunication provider. This is the oldest IPO on this list. The company raised $15.301 billion on February 9, 1987.

Read more: Top 10 Largest Global IPOs Of All Time (BABA,V,DCM,FB,GM,NTT,ENLAY,AAIGF) http://www.investopedia.com/articles/investing/011215/top-10-largest-global-ipos-all-time.asp#ixzz3oRwNHv7R
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The Story of the Fisherman (and being ‘selective’ in your trading)

One of my favorite short stories and this story has been shared many times on the net, I am sharing Courtney Calver’s version here:

“An American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked.  Inside the small boat were several large yellowfin tuna.  The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The Mexican replied, “only a little while. The American then asked why didn’t he stay out longer and catch more fish? The Mexican said he had enough to support his family’s immediate needs. The American then asked, “but what do you do with the rest of your time?”

The Mexican fisherman said, “I sleep late, fish a little, play with my children, take siestas with my wife, Maria, stroll into the village each evening where I sip wine, and play guitar with my amigos.  I have a full and busy life.” The American scoffed, “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat, you could buy several boats, eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing, and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually New York City, where you will run your expanding enterprise.”

The Mexican fisherman asked, “But, how long will this all take?”

To which the American replied, “15 – 20 years.”

“But what then?” Asked the Mexican.

The American laughed and said, “That’s the best part.  When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions!”

“Millions – then what?”

The American said, “Then you would retire.  Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siestas with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”

The Mexican Fisherman smiled and thought, “isn’t that what I already do?”.

As the Mexican Fisherman demonstrated you can have more with less, in trading we should find a way to maximise gains with the least amount of risk and work. We should let the trade work for us (not the other way around).  This means being very ‘selective’. Easier said than done. I add quite a few tickers on my daily watchlists but most days I only try to heavily focus on 3 or 4 tickers at a time (sometimes these trades are only day trades, sometimes a few day swings). In my opinion, this enables taking advantage of  less risky trades (better risk/reward ratio compared to some other trades out there), consistency and selectivity. Think about it before the next trading session…

I hope this helps.

MT