If you've ever tried to call your broker and secure some shares of a hot initial public offering (IPO), you may have been told, "Sorry, our firm isn't being issued any shares." The truth is, it's darn hard for us small investors to get a piece of any IPO action. Fortunately, that's not such a bad thing, as you'll soon read.
When going public via an initial public offering, a company typically selects one or more lead investment banks to complete the offering, or "underwriting," process. The lead underwriters typically select a "syndicate" -- a group of other investment banks and brokerages (perhaps 10 or so) to help sell and distribute the shares. Each syndicate bank usually receives a small portion of the shares being offered to the public.
If a million shares of Pearls for Swine Barnyard Jewelry (ticker: OINK) are being offered, the lead underwriters may keep 800,000 shares to sell and allocate the remaining 200,000 to the syndicate banks. Syndicate banks may be selected because they have a desired customer base (individuals/retail, institutional or regional, for example), or perhaps because of inter-firm relationships.
When you look at an IPO announcement in a newspaper (the notice is called a "tombstone"), the lead underwriters are the ones listed on top in the biggest print. The syndicate banks are listed below.
Your brokerage was probably not in the syndicate for the IPO you were interested in. Note that, even if it was, you might not have been deemed worthy of some shares. Since each syndicate member only gets a relatively small number of shares, they may just go to major customers. The rest of the customers who desperately want shares will have to buy them on the open market, from investors who got some initial shares and want to sell them immediately at a higher price.
Most IPOs don't do well at first. Some spike up quickly, and then slump for a year or two, while others never really spike much at all. Fools avoid investing in IPOs, preferring to observe how the business does in its first public year. With thousands of public companies out there, why pin your hopes on a firm that usually doesn't have much of a track record?
Still, if you really want to consider IPOs, click into our ABCs of IPOs collection and also read this recent article by Jeff Fischer. (You'll find more by him on young companies in his archive.)
For some additional ideas of small companies that look mighty tasty as possible investments, check out the new investment newsletter by one of our Fool co-founders: Tom Gardner's Motley Fool Hidden Gems. It serves up several stock ideas each month. You'll find more Fool research products in good old FoolMart.
