Wednesday, January 21, 2015

Everything you need to know about Initial Public Offerings (IPO's) - Made Simple

The Ultimate Guide to Initial Public Offerings
UPDATE: will now also be offering IPO allocations in the near futre.

About: The Ultimate Guide to Initial Public Offerings (IPO's, including a review of Loyal3).

First off, IPO is an acronym and not worth that many points in scrabble (well, I don't even think acronyms are allowed). But it's a nice picture right?

Anyways, wouldn't it have been nice if you could have purchased Facebook, Alibaba, or GoPro at the IPO price? You could have made a nice chunk of money if that opportunity were available to you. The year 2014 was a big year for IPO's and 2015 may also be a big year.

I want to help make Initial Public Offers simple to understand. So follow along. Here is everything you need to know:

What are Initial Public offerings (IPO's)?

When a company decides to go "Public" and offer part or all of its ownership to investors, they work with a bank or banks to set up an IPO. This whole process is called underwriting. Some of the big name underwriters that carry out this process are Goldman Sach, Stanley Morgan, Credit Suisse, JP Morgan, Citi, etc. You get the idea. You'll recognize the bigger names when you see them. There are hundreds because even smaller banks also facilitate IPO's. The bigger the bank, the bigger the IPO.

JP Morgan IPO

Is this important? Yes, because generally there is much more risk with smaller IPO's. So if you see an IPO that has "small town capital group" as the underwriter, there is more risk in that IPO...but where there is more risk there is usually more potential and opportunity.

However, you'll probably only hear about the bigger IPO' maybe it isn't important to you.

So once a soon-to-be public company finds an underwriter(s) they then work together to agree upon how many shares (how many pieces of the pie) will be offered and for how much. There is a price that is agreed upon between the company and the banks facilitating the IPO. This price is generally set in stone the day before the stock goes onto the stock exchange market.

Companies can make the price as high as they want, BUT if it's too high not enough people will buy into the company. If the share price and number of shares are too low they won't be able to raise the capital they need to grow the company.

This price is based on a number of factors such as:

  • Company's current financial statements (profit, debt, liabilities...)
  • Market "buzz" for the company
  • General economic conditions
  • Growth potential
  • Speculation
  • Etcetera (It's kind of nice to actually spell out the whole word)
Why would a company want to go "Public" and sell ownership to share holders? Well, it's simple....More opportunity to grow, more working capital, and greater flexibility in their business.

So basically an IPO looks like this:

When to buy into an IPO

When you hear about getting into an IPO stock it's VERY important to understand WHEN you are getting into the IPO. Are you getting in HERE?:

or are you getting in HERE?:

If you are getting in on the latter, you better be careful. You want to be able to get in BEFORE the stock starts trading on the market. This is called the IPO allocation price. Why do you want in here? Because generally that will be the cheapest price (we'll look at some data below to illustrate this). This is the tricky part though. How do you do that if you are not a privileged investor, employee, or a big bank?

How to get into an IPO

Until recently the only way to actually purchase this IPO allocation was to be 'privileged' as mentioned before. You could be considered 'privileged in a few different ways:

  1. Large investor. For example, if you had hundreds of thousands of dollars in investments with JP Morgan and they were the main underwriter for the IPO, then there is a good chance you would be offered an IPO allocation.
  2. Employees. Lets say you worked for Facebook as an employee before it went might be offered the IPO allocation. Thanks Facebook!
  3. Customers. Another way that I was actually offered an IPO allocation was from being a customer of the company going public. For the past 4 years I have been a customer of and when they went public I was offered IPO allocations. there there is another option for the 'common' folk to purchase IPO shares.

Another Way

There is another way for others who are not so privileged to get a piece of the IPO pie. A new company called Loyal3 provides a way for ANYONE to get IPO allocations from select IPOs. Loyal3 is a fee-free brokerage that allows anyone (with money of course) to purchase select stocks and IPO's. Only select big name companies are available through them....but I think this is a good thing when it comes to IPO's. 

The bigger IPO's have a better chance of increasing in value from day one because they generate a lot of hype. This is at least good in the short term. 

Here is a list of all the IPO's that were available last year in 2014 through Loyal 3:

As you can see, if you were to have gotten the IPO share price of ANY of these stocks you would have had a 5% - 75% increase in your investment. That's IF you decided to sell your shares the 1st day or the 1st week. Thus far, most of those stocks have gone on to make much larger gains, although 2 of the 8 have had significant loses. Yes, 2014 was a great year for IPO's, but those are still great numbers.

Loyal3 can make IPO's available to you and me because they do it through "Social IPO" purchasing -meaning Loyal3 utilizes the power of groups of people to make these IPO's available to you as an individual.

How much can you get with Loya3?

Currently the maximum amount of IPO shares you can purchase via Loyal3 is $10,000. But just because you put in an order for $10,000 in shares does not mean you will get that much. Loyal3 only gets a set number of shares available for them to give to their customers from the company going public. If a small amount of Loyal3 customers are wanting the IPO allocation, then there is a good chance you'll get your full order. If there is high demand, then you will probably only get a part of what you wanted. UPDATE: The max order varies for each offering.

For example, back in November I requested purchasing $10,000 worth of Store Capital (STOR) IPO shares. When everything was settled I only got $1,300 worth of the shares (I did this for my wife's account also so you can multiply that by 2).

 If I were to have requested only $1000 worth of IPO allocation, I would have only received around $130 worth of shares. That would have been really disappointing. I imagine that this is common for all of the IPO's Loyal3 offers, so if you really want the most you can get, put in the max amount (and have your spouse do the same under a separate account!).

Loyal3 IPO tip: If you decide to sign up with Loyal3 (it doesn't cost anything to sign up), you will want to get on the IPO notification list with the following link:

When an IPO is made available, immediately sign up for the max $10,000. If you wait more than a few hours, the IPO will not longer be available to you. You can later cancel or change the amount without any consequence or fees.

The Strategy

If you can get into an IPO it's great, although there is ALWAYS the chance of losing money on any investment. But the risk of a big named company that is featured on Loyal3 having its price go below the initial allocation price is low as I pointed out earlier (0 have done that so far).

Go Short

So the strategy is simple. Get as much IPO allocation as you can and then sell it the first day it starts trading. Maybe you would even consider selling it after a few days to let it possibly rise a little more. The downside to this is that you will have to pay short term capital gains tax on an profit you make, which is equal to your income tax for the year (ranging from 10% to 39%).

Go Long

Now if you feel like you really like the company that you are invested in then you could keep if for the long term (anything over a year). Now I would say there is more risk involved in doing this, but there is also greater potential. Also, When you do sell, you won't have to pay as much tax (0%, 10%, or 20% depending on your tax bracket).

For my purchase of Store Capital (STOR) I decided I liked the company and wanted to keep the shares for the long term (at least 1 year). You must be aware that brand new stocks are very volatile and will have big ups and big downs. If you do decide to stay for the long term, maybe it's best not to look at the stock price everyday as that might make you go crazy.
IPO Long or short?
Which is Better? Short term or long term?

You will have to decide that in the end. For me, there are some companies that I would want to stay with long term and others I wouldn't. Generally, to play it safe, I think the short term would be the safest way to go.

DISCLAIMER: I am NOT a professional financial advisor and only offer my perspective. Please be prudent in your financial decisions. I would recommend investing most your money in diversified index funds with low fees such as Vanguard index funds. This has been proven to be the wisest, safest way to invest. I would recommend only investing in high risk individual stocks with a smaller potion of your investments and if you have the risk tolerance.

Are all IPO's successful? NO!!!! Check out King Digital Entertainment (KING) (candy crush company). Their price dropped almost 20% the first day. However, companies want their stock to increase in value from day 1 and therefore usually try to set an IPO price up for success.

Some terms that you may want to be aware of:

Prospectus -- All the legal mumbo jumbo that discloses all the companies financial statements and details of the initial public offering. It may be too much to read the whole thing, but I would go through it. Particularly, I like to see the what the company intends to do with the raised capital.

Flipping - Buying and selling stocks in a short amount of time (days or even within the same day). It is perfectly legal, however it my be frowned upon by the bank you are doing it with. The only thing this means is that the bank may limit your participation of IPO's in the future. Institutions do this all the time.

Lock-up Period - Period of time where executives and other investors working with the company going public are not allowed to sell or "flip" there shares for a certain time period...usually about 90 days. It is not uncommon to see a drop in the stock price when this period ends as many of these investors want to realize their returns.

Quiet Period - Period of time where a company cannot make any announcements about itself including new management, financial statements, new products, acquisitions, plans, etc. This period usually lasts 30 days.

Dutch Auction - A method of setting the IPO price. It's sort of like an auction (hence Dutch Auction). The way it works is investors place a bid for 'X' amount of shares at 'X" price and then all the investors that had the top prices bid will get their shares. However, they will get their shares set at the price of the lowest successful bidder.

Potential 2015 big name IPO's

  • Airbnb
  • Box
  • DropBox
  • GoDaddy
  • Palantir Technologies
  • Pinterest
  • SnapChat
  • Spotify
  • Square
  • Stripe
  • Uber
  • Vice Media
  • Smashburger
  • Ferrari
  • Univision
  • PayPal

What do you think? Questions? Share your experience with IPO's!


  1. Several inaccuracies in your article. TRUP is Trupanion, not Transpanion. It is a health insurance subscription for pets. It was not available to the general public on Loyal3 as an IPO. It was only available to their healthcare partners and employees.

    Virgin America (VA) was another Loyal3 IPO that was available only for their employees and largest customers.

    For those IPOs that are limited to customers/employees only, you can purchase the stock on the first day of public trading. Put your buy order in early on the first day. You can take advantage of getting your full purchase amount at first-day trading. It won't be at the IPO price, but it will probably be a bargain compared to waiting a few days to buy. I did that with STOR. I was allotted only a few shares in the IPO, but then I put in another buy request on the first day of trading and bought the stock at a much lower price than today.

    (One quick note. Several days may pass before Loyal3 announces that an IPO stock is now available to buy in public trading. You could purchase VA and STOR on the first day of public trading through Loyal3 even though Loyal3 waited several days to announce it. You just have to keep checking the site during that first trading day to see if the stock is listed.)

    Sometimes, you are notified before the rest of the public about a Loyal3 IPO offering if you are an established customer of a company. But in this case, your Loyal3 reservation is limited to $2500, not $10K. For example, as a Dave & Buster customer, I was notified about the PLAY offering two days before it was released to the general public. But my maximum reservation was $2500. If I took a chance and waited for it to be released to the public, then I could have reserved $10K.

    1. Thanks for your comment!

      Good catch on the Trupanion spelling. I corrected that.

      There are many circumstances where customers and or employees get the actual IPO allocated price. For example, I'm a customer of (LC) and I was offered the IPO allocated price because I was a customer. Yes, there are circumstances where employees or customers can purchase stock in the early first day trades, but that is not the IPO allocated price and not the topic of this articles discussion.

      I'm not sure what the max order was for PLAY, but currently the max IPO you can get with LOYAL3 is 10k, not $2500...that does not guarantee the full 10k depending on how much demand there is.

  2. This comment has been removed by the author.

  3. Great post, I really learned a lot! After reading this post, I signed up for Loyal3 and used your strategy to participate in the Blue Buffalo IPO, which exceeded my expectations with 30% jump in 1 day. Although, now I wish I had hung onto the stock because I think it's going to go nuts in the next couple of months.

    1. Dave,

      I'm glad you had success! It is always a risk, but I feel if you can get in on an IPO, the risks for depreciation on day 1 is lower. If you like a company, staying long term is always an option. Good luck!

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