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All trading basics

Conclusion and Resources

Let's review the basics of an IPO:

  • An IPO is the first sale of stock by a company to the public.
  • Broadly speaking, companies are either private or public. Going public means a company is switching from private ownership to public ownership.
  • Going public raises cash and provides many benefits for a company.
  • The dot-com boom lowered the bar for companies to do an IPO. Many start-ups went public without any profits and little more than a business plan.
  • Getting in on a hot IPO is very difficult, if not impossible.
  • The process of underwriting involves raising money from investors by issuing new securities.
  • Companies hire investment banks to underwrite an IPO.
  • The road to an IPO consists mainly of putting together the formal documents for the regulators and selling the issue to institutional clients.
  • An IPO company is difficult to analyze since there isn't a lot of historical info.
  • Lockup periods prevent insiders from selling their shares for a certain period of time. The end of the lockup period can put strong downward pressure on a stock.
  • Road shows and red herrings are marketing events meant to get as much attention as possible.
  • A tracking stock is created when a company spins off one of its divisions into a separate entity through an IPO.
  • Don't consider tracking stocks to be the same as a normal IPO, as they have limited shareholder rights.

Also See

AGENT
An agent is a brokerage firm representing an issuing company when selling or trying to sell securities to the investing public. Agents have no vested interest in the IPO other than their commissions and do not guarantee the sale of a certain number of securities.
BEST EFFORTS VERSUS FIRM COMMITMENT
Under a best efforts deal, the shares issued are directly sold to primary investors through the syndicate of brokers who are acting solely as agents, i.e. intermediaries distributing the shares. In the case of a firm commitment deal, the brokers act as principals, i.e. own the shares momentarily before they are offered to investors because they have committed to acquire a fixed number of shares at a fixed price.
BOOK RUNNER
In a syndicate, the lead underwriter usually also acts as the book runner whereby it allocates portions of the securities to be issued to institutional accounts and maintains the book of securities sold, thereby gauging the interest of the investing public for an upcoming issue. Generally, in the case of the issuance of common shares, 75% of the offering is purchased by institutional accounts and 25% by retail investors, whereas in the case of an offering of trust units, 75% is purchased by retail investors and 25% by institutional accounts.
CANADIAN DEPOSITORY SECURITIES LTD (CDS)
CDS is Canada's national securities depository, clearing and settlement hub - supporting Canada's equity, fixed income and money markets. It holds more than $2 trillion in shares on deposit and handles over 50 million transactions per year. CDS is owned by the major Canadian banks, members of the Toronto Stock Exchange and the Investment Industry Regulatory Organization. www.cds.ca
FLOW-THROUGH SHARES
Shares entitling the holder to receive certain fiscal advantages, in addition to the potential capital appreciation and dividend payments, that are passed on by the corporation issuing the shares. Flow-through shares are generally associated to resource-based industries.
GOVERNING JURISDICTION
Jurisdiction a company has elected to report to. The governing jurisdiction usually corresponds to the regulatory body of the province or territory of the issuer.
INITIAL PUBLIC OFFERING (IPO)
The process through which a privately-held company transforms itself into a publicly traded company by offering a significant portion of its ownership to the public. From a regulatory perspective, this process usually takes between 4 to 8 weeks. From an operational perspective, a company may require as much as a year or more to prepare for an IPO.
INSIDER
An insider is a person with access to inside information regarding the operations or transactions of an issuing company. An insider generally occupies a position within the issuer providing access to information to which the investing public has no access.
LEAD, CO-LEAD UNDERWRITER
Lead and/or Co-Lead Underwriters work with the issuing company to determine the specifics of the offering: the size, the number of shares issued, the pricing and timing of the offering. The lead Underwriter establishes the underwriting fees and invites other brokerage firms to participate in the syndicate. Top left position on the list of Underwriters usually reflects the leading role amongst the syndicate of Underwriter(s) involved in the deal. Likewise, a position on a top line suggests a more important position, or a larger portion of the deal to underwrite, than a position on line 2.
LISTING
Companies wishing to raise capital through the equity capital markets, whether as an IPO or a secondary offering, must list their securities on a stock market. The TSX and the TSX Venture Exchange are the two main stock markets in Canada. Application for a listing is filed in parallel to the application for a visa.
LOCK-UP PERIOD
Period after the closing date during which underwriters and insiders of a company cannot sell newly issued shares. Usually, applicants are subject to a lock-up period of 90 to 120 days while insiders are subject to a lock-up period of up to 18 months.
PRINCIPAL
A principal is a main party to a transaction, acting for his own account and risk. Principals have a vested interest in the securities being offered, buying the issue from the issuing company and guaranteeing sale of a certain number of securities to the investing public.
PROSPECTUS
A document describing securities being offered to the public. This document may be provisional or final. A prospectus discloses pertinent information and risk factors that may affect the value of the issue. A prospectus is prepared by the issuer, the broker and their respective advisors, and is formally filed by the issuer in order to obtain a visa.
QUIET PERIOD
Period starting from the filing of the Preliminary Prospectus and ending on closing of the IPO during which the issuing company is subject to a ban on promotional advertising regarding the company’s securities to be issued. Regarding an IPO, research analysts are also subject to a quiet period which, in their case, extends to 40 days after the closing.
REGULATORY AUTHORITIES
The regulatory authorities are provincially regulated organizations with responsibilities for overseeing the distribution activities of financial products and services, administering and ensuring compliance with the relevant laws in force in their territories. Regulatory authorities also supervise the exchanges and clearing and settlement (clearing house) activities.
REVERSE TAKEOVER
The process through which a company transforms itself from a private ownership structure to a publicly traded company by acquiring the often inactive shell of a public company. This process requires the preparation of a prospectus in order to inform current shareholders and prospective buyers of the securities of the intended change in the nature of the business.
SYNDICATE
A group of underwriters participating in the same issue. A syndicate is often required for high-value IPOs which require access to a large number of investors.
UNDERWRITER
An underwriter is usually a brokerage firm hired by an issuer to facilitate its access to the capital markets. An underwriter is a principal in the case of a firm commitment deal or an agent in the case of a best efforts deal. Other roles assigned to brokers in an IPO are book runner, lead and co-lead.
VISA
A visa is the formal acceptance of a prospectus. It is issued by regulatory authorities and its issuance allows the issuer to solicit prospective subscribers or purchasers