The One Trap Even IPO Experts Fall For

by | Oct 12, 2019 | Editorial, IPO Corner | 0 comments

Yesterday, I told you we’d be talking about patience and what it means in the IPO trading world… patience isn’t boring… patience is wise… and in our case, opportunistic.

Now, before we start talking about it — let’s talk about what everyone knows about IPOs

There’s nothing more exciting than waiting for an initial public offering (IPO) to start trading…

… a brand new company hitting the New York Stock Exchange (NYSE) or Nasdaq, ready for us to buy and sell…

… the lights flashing and the bid and ask prices are moving fast — enticing traders to place orders before the first trade hits the tape.

Even picture the company ringing the bell on the exchange  — trying not to look nervous… it’s all a lot of TV hype… but what isn’t TV hype are the trading opportunities.

Can you imagine a world where the most unskilled investors and traders are putting their money into something without fundamentals, without history, and based mostly on sentiment?

Yeah… well, that’s what you’re seeing with IPOs. And professional traders like myself are here to feast on that… and now you will be too.

You see, one of the traps that all IPO traders face is whether you should buy an IPO right out of the gate, or wait for things to settle down.

It kind of reminds me of my professional basketball days… where most rookies think once they catch the rock, they have to take the shot — without really assessing the situation.

Being a professional athlete has taught me one thing: patience…

… and it directly applies to trading IPOs.

You see, there are some times when you want to jump the gun and take the first price you get…

…then there are other times where you should just sit on your hands and wait for the stock to settle before making a move.

Since the first day, an IPO trades is one of its most important, I want to walk you through my process and how I decide whether I will be trading a newly-issued stock on its opening day.

What goes down on opening day for an IPO

The first thing you need to understand is the fundamentals of IPO trading and some basic terminology.

You can’t play a game of pickup basketball if you don’t know how to dribble…

One of the most important prices to keep in mind when you’re trading an IPO is the offering price.

The offering price at which the newly issued stock is first sold to the public, and it’s usually set by the lead underwriter — typically valued based on how much the company is seeking to raise, and the supply and demand.

Typically, we’ll know what the offering price is the night before the IPO is expected to start trading.

Why is this price so important?

Well, it gives you an idea of whether an IPO is going to be hot… or a dud.

You see, prior to the day the offering price is set, we have an idea where the IPO is priced at, based on the offering range (which can be found in the preliminary prospectus).

Generally, if the offering price is above the upper-end of the range, it’s an indication an IPO can be strong.

On the other hand, if the offering price is priced below the lower end of the range… it indicates weak demand.

Don’t get fooled by a false signal

If you don’t know anything about IPOs, if you’re not a high-net-worth individual who does a lot of business through one of the managers of the IPO… it’s nearly impossible for you to get shares at the offer price.

Instead, you have to wait until the day it starts trading to try to pick up some shares.

So what happens to the little guy?

Well, we’re left to fend for ourselves… trying to decide whether we should buy shares at the open…

… and this is one of the pitfalls many IPO traders go through.

They see an IPO price above the offering range… wake up the next day, and place a market on open order to buy shares of the stock — that way there’s a high probability they get filled and they’re long.

Sure, that strategy may work sometimes… but it’s never a lock.

Take Smile Direct Club (SDC) — the stock was expected to price between $19 and $22 a share.

However, there was “demand” for SDC, and the stock was priced at $23 a share.

That meant whoever was “lucky” enough to get allocated those shares would own it at $23.

Everything seemed great…

… until SDC started quoting on the Nasdaq.

The bid and ask prices were actually below the offering price of $23 — that was a signal there was no demand for the stock… and whoever got long at $23 took it on the chin.

The first trade actually went off at around $20.50…

… and just look at what happened to the stock.


In my opinion, it only makes sense a handful of times to try to buy on the opening print… but in most cases, remaining patient and seeing how the IPO trades is a safer bet.

For the most part, I like to wait for the open, and look at the level 2 — the bid and ask prices, which gives me a better idea of where the supply and demand are.

If you look below (the level 2 is on the left-hand side) and on the right-hand side, you’ll see the candlestick chart, which tells us the overall trend of the stock.

Thereafter, I look for one of my favorite patterns and make a well-informed decision before buying.

I get it… it’s exciting trading IPOs, but when you aren’t patient, and jump the gun… you could run into problems and actually lose money on an IPO.

If this all sounds new to you, that’s okay…

… in my next letter in the coming days, I will get you up to speed with all the lingo, so you know how to speak like an IPO trader. It’s important to know the specific language because we’re going to be doing something that’s is extremely particular… and why talk in generalities when we can learn to be professionals.

Stay tuned.