Start the conversation
The 2014 IPO market has been busier than any year since the "dot-com" era of 1999-2001, with 94 companies holding an initial public offering through the month of April.
Through the first four months of the year, 138 companies have officially filed for IPOs. According to Renaissance Capital, every month in 2014 has far outpaced its average for IPO filings from the previous nine years.
But for those unfamiliar with the inner workings of Wall Street firms, the IPO market and the IPO process can be complicated. Terms like "lock-up periods" and "offer prices" get tossed around frequently without any explanation.
Fortunately, Money Morning's Capital Wave Strategist Shah Gilani is an industry veteran and former hedge-fund manager who's had a unique look inside the IPO process.
That's why he addressed this recent reader question about investing in IPOs. Shah removed the mystery from the IPO process for retail investors and explained some of the more complicated factors… Take a look.
An Inside Look at Investing in the IPO Market
Reader Question:What is it about initial public offerings? Why do companies hold an IPO before putting their stock on the public market? How do you make sure you gain the most from IPOs? There is a lot of hype around IPOs. It makes me wonder: What are the hidden risks?
Answer from Shah Gilani: An IPO is when a business first sells shares of itself to the "public." IPOs are "priced" the night before they are launched. Basically, investment bankers discuss the market and the how they think the new shares will trade, and they usually have an expected range.
Here's how the IPO price range works…
Let's say the range is $20 to $25. If the bankers think there is a lot of demand for the shares, they might price the shares at $25, and presumably when the shares start trading, they will open at $25 and keep going higher if there is a ton of demand.