What is an IPO?
It is the initial public offering. So most companies, well probably all companies start out with some sort of private funding. Whether that be you started a business with $500 of your own money, maybe you borrowed some money from your parents, maybe you got an investor or maybe you proceeded all the way through.
You know a lot of companies are boot strapped. We had basically put a couple hundred bucks in the bank, we drove all the money back into the company, built it up and then I eventually retired from that business to go into full-time stock trading. But anyway the idea is companies start out privately funded.
As they grow up, and as they get bigger and they want to expand, they want to hire employees, maybe expand overseas, build another factory, they need more capital and that's when they go to the public markets. That's when they list to be publicly traded to sell equity on the public markets.
So now instead of getting money from a bank or a private investor or their parents or a friend or whatever, they're going to the public market. So now you, as an investor in the U.S. Stock Exchange, you can buy a small piece of this company because you believe in it and you think the value of the company will go up over time.
They take your capital, fund operations, ideally increase profits, grow the company, you get rewarded over time. It's the same model, they're just going to the stock market instead of pursuing private funding or from a bank.
Why do we want to trade them?
Well the why is mania. Stocks would publicly list and just go insane. Now we've seen that also in 2018, 2019 with I believe at this point of recording, a great example is Beyond Meat.
Beyond is the ticker. And I admit, I'm skeptical of the company. They make artificial meat, a lot of chemicals. But the fact is, everyone is in mania mode. They see this as the future and this stock listed in the 70s and went up as high as over 200 in a few weeks. It's pulled back a little bit as of today but it's also trending back. And we've had tons of other hot IPOs.
Pinterest, Uber, Lyft, they go on. But the reason the why behind it is animal spirits. People see these companies. They see the potential. They want in now. And you can capitalize on that as a trader. You don't get suckered as a day trader, as a smart trader, as a real trader, you don't get suckered into the mania. You calculate it and you attack at a good time.
Newbies, people that believe the hype, they buy day one of the IPO. I would tell you 99% of the time never buy day one. I'm particularly a technical-based trader. Most short-term traders are. We believe in the charts. And what you want to look at is let that chart form out.
You don't care about that day one spike because lots of times they slam hard later in the day, they gap down the next day. Maybe they gap up the next day. It's not predictable. What you want to look for is being that sniper. Have that plan, let the chart tell you where this stock is headed.
So if the first couple days are big up and down, up and down, then the stock starts consolidating, starts trending higher, whether that be three days later, three weeks later or three months later, that's when you look to attack.
One of my favorite examples is Facebook. Bring up the 20 year chart of Facebook in your charting platform. You'll see that stock opened up, spiked, and it spent I believe, I'm doing this from memory, almost two years going nowhere. Then broke out and become one of the best stocks ever.
Thank you
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