Why IPOs crash after day one
42sReveals the counterintuitive truth that companies time IPOs to maximize their own profits, not to grow with investors.
▶ Play ClipAI Summary
This video explains the true mechanics behind initial public offerings (IPOs), revealing that companies time their IPOs to sell shares at the highest possible price rather than to grow with investors. It highlights how the initial price surge is often driven by institutional investors cashing out, while retail investors are left buying hope.
Chapters
[00:02]
The First-Day Surge Phenomenon
On the first day of trading, IPO shares often jump 20-30%, sometimes 50%, before the market suddenly falls. This happens because IPOs are conducted when shares can be sold at the highest possible price, not when they are cheap.
[00:15]
Years of Preparation and Perfect Timing
Companies prepare for IPOs for years, hiring investment banks to package their growth story and select the perfect moment to generate maximum interest. They also choose the time of year when profits will be at their highest.
[00:44]
The Real Reason for Going Public
Contrary to common belief, companies do not go public to grow with investors. They go public when the market is ready to pay the highest possible price for their securities.
[00:58]
Who Buys at the Placement Price
The initial growth after an IPO is often seen as proof of success, but the shares at the placement price are typically bought by large funds and institutional investors who received them before trading began.
[01:14]
Retail Investors Provide Liquidity
When private investors buy after news of a successful IPO, they think they are entering a growth story. In reality, they often provide liquidity for those who are cashing out.
[01:30]
SpaceX and Post-IPO Underperformance
SpaceX is cited as a recent high-profile example. Many companies trade significantly below their IPO price a year later, not necessarily because of bad business, but because initial expectations were higher than actual value.
[01:45]
Hope Is the Most Expensive Commodity
The most expensive commodity in an IPO is hope, and it is bought by the crowd.
IPOs are strategically timed to maximize the price for the selling company and its early investors. Retail investors often become the exit liquidity for institutions, paying for hope rather than fundamental value.
Mentioned in this Video
Study Flashcards (7)
How much can IPO shares jump on the first day of trading?
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How much can IPO shares jump on the first day of trading?
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They often jump 20-30%, sometimes even 50%, before the market falls.
00:02
What is the real reason companies conduct IPOs?
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What is the real reason companies conduct IPOs?
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To sell shares at the highest possible price, not to grow with investors.
00:44
Who typically buys shares at the placement price before trading begins?
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Who typically buys shares at the placement price before trading begins?
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Large funds and institutional investors.
00:58
What role do retail investors often play in an IPO?
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What role do retail investors often play in an IPO?
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They provide liquidity for those who are cashing out.
01:14
Which company is cited as a recent high-profile IPO example?
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Which company is cited as a recent high-profile IPO example?
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SpaceX.
01:30
Why do many companies trade below their IPO price a year later?
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Why do many companies trade below their IPO price a year later?
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Because the expectations at which the company was sold were higher than its actual value.
01:30
What is the most expensive commodity in an IPO?
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What is the most expensive commodity in an IPO?
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Hope, which is bought by the crowd.
01:45
💡 Key Takeaways
💡
The First-Day Rally Is a Trap
Challenges the common perception that a first-day surge signals long-term success.
00:02
📊
IPOs Are Timed for Maximum Price
Reveals that companies and banks strategically pick the moment to sell, not to grow with investors.
00:15
📊
Institutional Investors Get the Pre-IPO Allocation
Explains how the initial pop is often institutional profit-taking at the expense of retail buyers.
00:58
💡
Retail Investors Provide Exit Liquidity
A key insight that private investors are often the exit liquidity for early insiders.
01:14
💬
Hope Is the Most Expensive Commodity
A memorable, quotable summary of the video's core message about IPO dynamics.
01:45Full Transcript
[00:02] start the same way? The first day of trading is plus 20-30%, sometimes even 50%, and then the market suddenly bam and falls. This is due to the fact that IPOs are carried out not when shares are
[00:15] cheap, but when they can be sold at the highest possible price. The company has been preparing for its IPO for years, attracting investment banks to help package its growth story and choose the perfect moment to generate
[00:30] maximum interest. Not only quarterly reporting is selected, but also the time of year when profit will be maximum. Do you think the company is going public to grow with investors? In fact, it
[00:44] comes out when the market is ready to pay the highest possible price for their securities. And this is where the mechanics that they talk about in investment textbooks begin. The initial growth after an initial public offering is
[00:58] often seen as proof of success. But who bought the shares at the placement price? Often these are large funds and institutional investors who received them before trading could begin . So who buys after news
[01:14] of a successful IPO? And this is where private investment comes in. Investors feel like they are entering a growth story. In reality, they often provide liquidity for those who cash out. History knows dozens of such examples. One of the most recent
[01:30] high-profile IPOs is, of course, SpaceX. In general, after high-profile IPOs, many companies were trading significantly below their IPO price a year later. It's not always because of bad business. It's just that the expectations at which the company was sold turned out to be
[01:45] higher than its actual value. The most expensive commodity in an IPO is hope, expensive commodity in an IPO is hope, which is bought by the crowd. Subscribe.
