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Why You Couldn't Buy Twitter at $26

The initial public offering of Twitter (NYSE: TWTR  ) went well for the social-media company, with shares fetching between $45 and $50 throughout Thursday's first-day session. But many beginning investors wonder why they weren't able to get in on the opportunity to buy shares at the $26 price where Twitter priced its IPO.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at why most ordinary investors weren't able to buy Twitter at $26 per share. Going through the usual underwriting process, Dan notes that lead underwriter Goldman Sachs (NYSE: GS  ) and its peers generally have a big say in who gets to purchase shares in an IPO, often reserving the most promising offerings for their best clients. The resulting demand from other investors often causes big pops in first-day prices, as we saw at least early on with Facebook (NASDAQ: FB  ) and with Thursday's big move up in Twitter.

Dan points out, however, that not all IPOs are done this way, discussing the example of Google (NASDAQ: GOOGL  ) and its Dutch auction almost a decade ago. In general, though, the profit opportunity for Goldman, Morgan Stanley (NYSE: MS  ) , and other underwriters gives them a big incentive to structure IPOs this way -- even if it means you don't get first dibs at the stock.

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Read/Post Comments (10) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 10, 2013, at 12:40 PM, 1297US12 wrote:

    Twitter, Goldman Sachs, Morgan Stanley suck. I hope the Fed's screw over Sachs and Stanley for their crooked mortgage dealings. Too many other good stocks out there to make money from, I don't need Twitter's stock or to belong to Twitter, let GS and MS post on there. May sound like sour grapes but I'm sick of Sachs and Stanley screwing the public while they make millions.

    Gary O

  • Report this Comment On November 10, 2013, at 8:34 PM, JPS73 wrote:

    IPO(initial public offering) always was and always will be a misnomer. There is no such thing as a public offering of a stock that everyone knows will almost double in price after being issued. Yes it's true, the rich get richer.

  • Report this Comment On November 11, 2013, at 4:12 AM, imrahil74 wrote:

    It's such a sign of the times that we live in that a company which has yet to generate or earn a single dollar in actual profit or produce a single product now has a market cap of $25 billion.

    All this hype about internet companies is just so the big brokerage houses can make a lot of money for nothing. It's all just a legal pyramid scheme.

  • Report this Comment On November 11, 2013, at 10:20 AM, marder1 wrote:

    ...because I am waiting 30 days to buy this overhyped penniless TWEEN/TEEN gabfest, whose audiance has ZERO money to spend on any ads posted, to get to $23 and bagholders to continue to dump?

    I can't even BUY any more shorts to short this empty headed offering.

    See you at $23

  • Report this Comment On November 11, 2013, at 10:37 AM, constructive wrote:

    If you think the US IPO market is bad, try most other markets. The average first day pop in Saudi Arabia is 254%.

    The reason you couldn't buy it at $26 was that no one was willing to sell it to you at that price.

  • Report this Comment On November 11, 2013, at 1:22 PM, fwe43 wrote:

    MegaShort said "The reason you couldn't buy it at $26 was that no one was willing to sell it to you at that price."

    And no one is willing to sell it to you at that price because you're not a super wealthy privileged client of the underwriter. It pays to be rich.

    Reminds me of "investing" in fine art. In order to get access to buying top/hot artists whose work is practically a sure thing to go up in value you have to be a "preferred customer" of the art galleries that represent the artist. So the rich collectors get access to works that will double in price and continue to get even richer while the other collectors are left on the outside looking in and have to buy the leftovers or get extremely lucky by picking one of the few artists who get big, before they get big.

  • Report this Comment On November 11, 2013, at 4:19 PM, tdizz wrote:

    I thought the market was all about free capitalism. HA!

    The US is always socialistic when it hurts the rich but when it favors them it is just how the game is played. The hypocrisy is amazing and is why as the retail investor gets educated they find out the market is rigged against them.

  • Report this Comment On November 11, 2013, at 9:33 PM, constructive wrote:

    Well if you think it's easy to underwrite IPOs, why don't you start an investment bank?

  • Report this Comment On November 12, 2013, at 11:07 AM, jkd77 wrote:

    How is this practice legal? How are there no rules for IPO access set forth by the SEC?

  • Report this Comment On November 18, 2013, at 3:13 PM, Realexpectations wrote:

    These are the same guys we handed over hundreds of billions of dollars to with no strings attached in a 3 page bill.

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