The ultimate guide to IPOs

Any way you cut it, 2014 has been an epic year for initial public offerings.

In mid-September, Chinese e-commerce sensation Alibaba Group Holdings (BABA) raised $25 billion, the biggest global IPO ever.

With the hefty valuations of the startups are commanding, some wonder if a market bubble has emerged in tech. Others have gone one step further and predicted the mania in tech stocks would collapse this year.


Global IPO volume is clocking in at about $176.1 billion as of late September and may eclipse the record $178.5 billion mark set in 2007.

IPOs are hot topic in investing. But do you really understand the lingo behind the process of a private company raising money and listing shares on a major stock exchange?

Here’s a quick primer on the basics.

Lead underwriter

This refers to the investment bank that advises a company on how to prepare for its public offering, price its shares and attract institutional buyers to purchase and distribute its shares.


A company that wants to sell its shares must file a prospectus with the Securities and Exchange Commission (SEC), listing financial data, growth strategies and risk factors.

A preliminary prospectus is sometimes called a “red herring,” a reference to the red ink on the front page.

Road show

This is the issuing company’s chance to strut its stuff before institutional investors with presentations on its outlook in cities around the world.

Offering price

The lead underwriter talks to potential investors to gauge interest and come up with a per share price that will attract interest. If all goes well, a syndicate of banks will agree to buy and distribute a certain percentage of the offering.


This occurs when an investor buys the stock at the offering price but then quickly sells to lock in profits if the there is a pop in the early days of trading.

Quiet period

During this time, companies that file a prospectus are not allowed to release new information that has not been already disclosed to the SEC.


For 90 days after an IPO, insiders and venture capitalists aren’t allowed in the U.S. to sell stock to lock in gains. 

Green shoe

This refers to a provision in many underwriting agreements. If an IPO is over-subscribed, the issuer is authorized to sell additional shares. (That was the case in the mega-Alibaba IPO this year.)

Now that you can talk the talk, let’s zero in 5 interesting facts about the IPO that will let you shock and awe friends and business associates with your market sophistication.

1) Alibaba mania

The Chinese e-commerce giant is the reigning heavyweight champ of the IPO world. The $25 billion it raised eclipsed the Agricultural Bank of China’s 2010 offering that attracted $22.1 billion and U.S. record IPO record holder Visa, which raised $19.7 billion in 2008.


2) Chinese Wave

Chinese companies have raised $45.7 billion this year through the mid-September, up from just $6.4 billion in 2013.

3) The Pop

Research firm Dealogic notes that the average one-day return for IPOs of $10 billion or more is is 9%. Visa shares surged 28% after it listed back in March of 2008. Alibaba finished up 38%.

4) Big 3

Which underwriter rules in the IPO world in 2014? Goldman Sachs (GS),  Morgan Stanley (MS) and JP Morgan (JPM), according to dealogic.

5) After Alibaba

The market for technology IPOs has cooled dramatically since Alibaba’s offering, thanks to increased market volatility and worries about global growth.

Companies have been delaying or pulling offerings scheduled in recent weeks. The latest example: mobile security specialist Good Technology.

Continued learning: Check out these 5 tech IPOs from hell

DISCLAIMER: The investments discussed are held in client accounts as of September 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.