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This is motivated by the recent LinkedIn IPO, but is a general question.

LinkedIn IPOed around $45/share, climbed to $95/share by noon, topped out around $122 on the day, then closed around $94/share. Motley Fool says additionally that the stock "opened" at $83/share, whatever that means.

I didn't attempt to buy LinkedIn, but what price could an individual investor have bought it for? I'm getting the impression that the IPO price of $45/share was unavailable to us? Is that typical? Was the "opening" price the price that we little guys could buy for?

Note: To my (naive) way of thinking, it seems a bit unfair that some investors can make an almost-guaranteed profit on these high-profile IPOs, and that these investors are funds that pay high commissions back to the banks controlling who invests. Normally, I would call this "stealing."

Note: The dollar signs above are USD.

  • "Opened" at $83 just means that was the price of the first trade. For more information on how stock exchanges and market-makers set the price the opening trade of the day, consider asking another question. :) – user296 May 23 '11 at 15:39
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If you participate in an IPO, you specify how many shares you're willing to buy and the maximum price you're willing to pay. All the investors who are actually sold the shares get them at the same price, and the entity managing the IPO will generally try to sell the shares for the highest price they can get. Whether or not you actually get the shares is a function of how many your broker gets and how your broker distributes them - which can be completely arbitrary if your broker feels like it.

The price that the market is willing to pay afterward is usually a little higher. To a certain extent, this is by design: a good deal for the shares is an incentive for the big (million/billion-dollar) financiers who will take on a good bit of risk buying very large positions in the company (which they can't flip at the higher price, because they'd flood the market with their shares and send the price down).

If the stock soars 100% and sticks around that level, though, the underwriting bank isn't doing its job very well: Investors were willing to give the company a lot more money. It's not "stealing", but it's definitely giving the original owners of the company a raw deal. (Just to be clear: it's the existing company's owners who suffer, not any third party.)

Of course, LinkedIn was estimated to IPO at $30 before they hiked it to $45, and plenty of people were skeptical about it pricing so high even then, so it's not like they didn't try. And there's a variety of analysis out there about why it soared so much on the first day - fewer shares offered, wild speculative bubbles, no one could get a hold of it to short-sell, et cetera. They probably could have IPO'd for more, but it's unlikely there was, say, $120/share financing available: just because one sucker will pay the price doesn't mean you can move all 7.84 million IPO shares for it.

  • Re the "not stealing" part, are there examples of IPOs that have gone strongly downward in the first day of trading? – Fixee May 23 '11 at 21:31
  • @Fixee - I don't really know! There have definitely been some which have fallen within the first year or so. I'd recommend you start with a Google search for "failed IPO" and go from there. – user296 May 24 '11 at 15:13
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    @Fixee - oh, here's one. Lone Pine Resources, IPO'd for $13, shares fell as low as $12.11 on the first day. Which is today, by the way. – user296 May 26 '11 at 15:41
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Some brokers have a number of shares they can offer their customers, but the small guy will get 100, not as many as they'd like. In the Tech bubble of the late 90's I was able to buy in to many IPOs, but the written deal from the broker is that you could not sell for 30 days or you'd be restricted from IPO purchases for the next 90. No matter what the stock opened at, there were a fair number of stocks thay were below IPO issue price after 30 days had passed. I haven't started looking at IPOs since the tech flameout, but had I gotten in to LinkedIn it would have been at that $45 price. Let's see if it stays at these levels after 30 days.

Edit - This is the exact cut/paste from my broker's site : Selling IPO Shares: While XXX customers are always free to sell shares purchased in a public offering at any time, short holding periods of less than 31 calendar days will be a factor in determining whether XXX allocates you shares in future public offerings. Accordingly, if you sell IPO shares purchased in a public offering within 30 calendar days of such purchase, you will be restricted from participating in initial and secondary public offerings through XXX for a period of 3 months. (I deleted the broker name)

I honestly don't know if I'd have gotten any LI shares. Next interesting one is Pandora.

  • "you'd be restricted from IPO purchases for the next 90". In other words, if there's no IPO in which you want to buy coming up for 90 days, you could sell at the end of the first day. Seems a minor penalty. – gef05 May 23 '11 at 11:34
  • @gef05 - The 90 day penalty was during the dotcom boom at a broker. The broker that I had at the time basically told you that you would be disqualified from participating in future IPO rounds. There was also a waiting list for low-net-worth individuals. – duffbeer703 May 23 '11 at 12:55
  • @gef05 - minor? I was getting in to as many as 3-4 per week. I made what some would call "a small fortune" by getting what I could and selling on day 91. In hindsight, The gain during that time was spectacular, and the losses (in our accounts) just about mimicked the S&P's fall. – JTP - Apologise to Monica May 23 '11 at 13:33
  • So I assume that if I tried to make money on LinkedIn via an E*Trade (or equivalent) I would have had to buy at a much higher price than $45/share, even if I tried to buy as the NYSE opened? Perhaps I'd have to pay even more than $83/share? – Fixee May 23 '11 at 21:29
  • Yes, you can go back to yahoo, or other finance sites and see how it traded during the day. It shows an open, initial drop, and then further rise. It depends what time of day you entered the order. – JTP - Apologise to Monica May 23 '11 at 22:50
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It depends a large part on your broker's relationship with the issuing bank how early you can participate in the IPO round.

But the nature of the stock market means the hotter the stock and the closer to the market (away from the issuing bank) you have to buy the higher the price you'll pay. The stock market is a secondary market, meaning the only things for sale are shares already owned by someone. As a result, for a hot stock the individual investor will have to wait for another investor (not the issuing bank) to trade (sell) the stock.

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