A few months ago, I wrote a short article on "How to Invest in IPOs." I myself had never actually invested in an initial public offering. As a result, most of what I had to say back then was pretty dry, textbook stuff -- discussing how the process is supposed to work in theory.
Not this time.
Theory versus practice
For as long as I've been investing (and it's been a couple of decades now), I've left IPOs to the mo-mo crowd -- folks who swarm a hot IPO hoping to buy low, sell at a premium, and move on to the next opportunity. Me, I usually prefer to see a few quarters of publicly traded financials before clicking the "buy" button on any stock.
Earlier this year, however, I received notice from my broker that -- if I wanted to -- I could submit an application for an IPO allotment in the then-upcoming ADT (ASX:ADT) IPO.
I have to admit that, having just finished writing about how IPO investing was supposed to work in theory, I was already interested in seeing how it would work in practice. And so I took the bait.
Practice makes imperfect
It didn't work out well.
ADT went public on Jan. 19 at an offer price of $14 a share -- down from its expected price range of between $17 and $19. At first, this seemed like good news: I would buy my shares at a cheaper price. Unfortunately, upon commencing trading, ADT fell even further, opening at just $12.65 and closing the day at $12.39. (It's proceeded to keep on falling ever since, closing Thursday at $8.79 per share -- roughly 50% below its originally targeted price range.)
Obviously, I've lost money on this investment. But was it money well spent as "tuition" to learn how IPO allotments work in practice? I think so. For one thing, I did not invest a lot of money in ADT. Just enough to learn firsthand how IPOs work in practice. I also lost a lot less money than I might have lost...which brings me to the first thing I learned from my first IPO allotment.
Ask, and you (may) receive ...
My IPO journey began on Jan. 5, 2018, with an email from my broker inviting me to submit an application for "participating in the [ADT] public offering," but cautioning that "confirming your indication of interest does not guarantee you an allocation of shares in the offering." Depending on customer demand, warned my broker, customers requesting IPO shares might receive all, some, or none of the shares they requested.
So why do brokers even ask their customers to state a specific amount of shares in their application to participate in an IPO? For one thing, underwriters incorporate the number of the requests for shares into their pricing of the IPO. They also use this information to calculate the "basis of allotment," or how many shares they will allocate to each broker for further sale to their customers.
You may receive some of what ye asked for
And so I went ahead and indicated interest in buying 500 shares of ADT -- not so much that it would break the bank if the stock collapsed, but enough to give my broker room to reduce my IPO allotment if it wanted to.
Two weeks after expressing this interest, my broker notified me that the ADT IPO was a go, and would in fact price at $14 a share on Jan. 18. The broker asked me to confirm, one final time, the status of my interest in buying those 500 shares of ADT. Did I want to "withdraw" my application or proceed?
That done, I was told to sit tight and wait. Sometime between 7 p.m. and midnight that evening, I would receive confirmation of my status -- and the next day, would learn how many IPO shares I was in fact allocated.
The magic number
The next morning, about a half hour before stock markets opened for business in New York, I received my final email...confirming only that shares were allocated -- but not confirming how many'd been allocated to me!
To know for certain, I had to log into my online brokerage account, there to find that the magic number was 100. I had indeed received an IPO allotment of shares -- albeit only 20% of the shares I indicated an interest in buying.
Over the course of that day, it took my brokerage account some time to fully come to terms with what was happening. For most of the day, my account could confirm the number of shares I owned, and could quote me prices on these shares. But it was unable to clearly tell me how much money I had lost (although it was clear I was already losing money on this ADT investment), apparently having difficulty recalling at quite what number the IPO had priced. Only toward the end of the day did things finally begin settling down, and my broker begin providing information similar to what was shown for my other, previously owned stocks.
So what is the upshot of all the above? Investing in IPOs isn't the clearest process. At times during the two weeks between receiving my invitation to indicate interest and ultimately receiving my handful of ADT shares, my status was less than clear.
Had I checked all the right boxes to confirm my interest?
Was my application really complete?
And when would I actually find out what I had bought, how much of it, and for how much money?
The fact that this confusion persisted even into the first few hours of trading on IPO day was an especially unwelcome surprise -- even more so than the obvious fact that the shares I had bought were rapidly losing value.
So what's my advice when it comes to investing in an IPO? First and foremost, there's no real compelling need to learn how to do this in the first place. Getting in on a hot IPO is no guarantee of earning a premium on your investment. (In fact, within my sample size of exactly one IPO, the opposite seems more likely.) Given this, and the lack of clarity of the IPO process, I suspect investors -- especially long-term investors -- can do just as well by sitting back, letting IPOs run their course, and buying only after things have settled down a bit and shares have begun trading like any other stock.