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What is Hot IPO and How It Works

26 Jun 2023

Introduction

Initial Public Offerings (IPOs) have always been an exciting event in the financial world. They provide an opportunity for companies to raise capital and for investors to get a piece of the action in a promising new venture. While all IPOs generate interest, some capture the attention of the market and become known as 'hot IPOs'. Let's explore the meaning of a hot IPO and delve into how it works, along with providing some examples to illustrate the concept.

What is a Hot IPO?

A hot IPO refers to an initial public offering that generates substantial interest and demand from investors, often leading to a surge in the stock price shortly after it begins trading in the secondary market. These IPOs tend to be highly anticipated, attracting institutional and retail investors alike.

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Hot IPOs are typically from companies that are considered to have strong growth potential or disruptive business models. They often operate in industries that are experiencing rapid technological advancements or are part of emerging trends. Companies with well-known brand names or high-profile founders can also contribute to the hype surrounding a hot IPO.

How Does a Hot IPO Work?

The process of a hot IPO is similar to any other IPO. A company decides to go public and hires investment banks to underwrite the offering. The underwriters help determine the initial offering price and handle the marketing and distribution of the shares to potential investors.

In the case of a hot IPO, the underwriters create a great buzz around the offering by generating substantial interest from institutional investors, retail investors, and sometimes even celebrities or influencers. They may conduct roadshows, where business leadership presents the investment opportunity to potential investors, highlighting the company's growth prospects and competitive advantages.

The underwriters carefully analyse the demand for the IPO and allocate the shares to investors based on various factors. Some of the prominent factors are their relationship with the investment bank, the size of the investment, and their track record as investors. This allocation process can sometimes contribute to the hype and frenzy surrounding a hot IPO, as more investors vie for a limited number of shares.

Once the shares are allocated, the IPO completes, and the company becomes publicly traded. Trading begins on a designated stock exchange, and the share price is determined by the supply and demand dynamics in the secondary market. In the case of a hot IPO, the demand often exceeds the supply, leading to a surge in the stock price during the early trading days.

Examples of Hot IPOs

Several hot IPOs have made headlines recently, capturing the attention of retail as well as institutional investors.

  • One such example is the IPO of Mankind Pharma Ltd., one of the largest pharmaceutical companies in India, which went public in April 2023. The Rs. 4,326-crore IPO generated immense interest, being subscribed 15.32 times.
  • IKIO Lighting IPO went public in June 2023 and was subscribed 67 times, raising upwards of Rs. 600 crores.
  • Another notable hot IPO is Zomato, the food delivery platform. They went public in July 2021 and the issue was oversubscribed multiple times, raising USD 1.3 billion.

Conclusion

A hot IPO is an initial public offering that generates significant interest and demand from investors. It often results in a surge in the stock price shortly after the trading starts in the secondary market. These IPOs are typically associated with companies that have strong growth potential or disruptive business models. The underwriting process and the subsequent allocation of shares contribute to the hype and frenzy surrounding a hot IPO. While hot IPOs can present exciting opportunities, it's crucial for investors to conduct thorough research and exercise caution to make informed decisions.

 

Related Articles: What's the big deal about IPOs? | 5 Tips for Investing In IPOs | What should you read in an IPO prospectus?

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