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.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Facebook, Goldman Sachs, and Google and owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.