Bending Spoons soared on its first day. Why the exciting IPO price is rarely the one you get, and how I read a hot new listing.
Markets · Beginner
The pop everybody sees
On the first of July, an Italian software company called Bending Spoons, the outfit that has hoovered up faded internet names like AOL and Vimeo, arrived on the American stock market to a warm welcome. It opened above its offer price and finished its first day up around 42 per cent, as reported in market coverage. Headlines love a debut like that, and it is easy to read one and feel a small, sharp pang of having missed the party. I want to gently take that pang apart, because it usually rests on a misunderstanding.
The price you read is not the price you get
Here is the bit the headline leaves out. When a company lists and the papers report it soaring forty-two per cent, that jump is measured from the offer price, the price handed to big institutional clients the night before trading opens. Ordinary investors like you and me rarely buy at that price. By the time the rest of us can click buy, the shares are already trading at the higher, excited number. So the giddy first day gain you are reading about is frequently a gain that was never actually on offer to you.
I learned this the slightly deflating way. The first time I tried to get in early on a buzzy listing, I discovered the thrilling opening price was one I was never going to be offered, and the price I could get had already swallowed most of the excitement. It was a useful, cheap lesson in reading the fine print behind a big number.
Why debuts run hot, then often cool
A first day pop is engineered as much as it is earned. Offerings are often priced to leave a little upward room, so the debut looks like a triumph and everyone involved gets their photograph by the bell. That initial scarcity, few shares and lots of eager buyers, can send the price up fast and then, once the excitement fades and more shares reach the market, back down again just as briskly.
There is also a quieter mechanism worth knowing. The people who owned the company before it listed, the founders and early backers, are usually barred from selling for a set period after the debut. When that period ends, and they are finally free to cash out, a fresh wave of shares can arrive on the market, and the price can feel it. A hot open, in other words, is the start of the story, not the whole of it.
How I actually read a new listing
None of this means new companies are traps, or that I never look at them, because I do, with interest. It means I try to separate the business from the fireworks. A debut tells me a great deal about mood, about how hungry the market is right now, and this year it has been hungry indeed, with the broad American market posting its strongest first half in decades. It tells me remarkably little about whether the company underneath will still look clever in three years.
So the froth is information, not the information most people think it is. It measures appetite, not worth.
The unglamorous conclusion
My honest approach to the hot IPO is the same one that served me almost everywhere in investing, and it is gloriously boring. I let the fireworks go off without me, I wait for the noise to settle, and I look at the actual business once it has to live in the ordinary daylight of results and reality rather than the flattering glow of its own launch party. Missing a first day pop has cost me very little over the years. Chasing them, when I have been foolish enough to try, has cost me rather more.
If resisting the exciting thing is the muscle you are trying to build, I wrote about why that kind of change is so hard, and how to make it stick, in Why Change Never Sticks.
The Jacqueline Brand — knowledge builds confidence, confidence builds wealth. This is editorial commentary for inspiration, not financial or professional advice. Always do your own research. The Collection
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