IPOs
 

In a Random Walk Down Wall Street Malkiel says “My advice is that you should not buy IPOs at their initial offering price and that you should never buy an IPO just after it begins trading at prices that are generally higher than the IPO price.” He goes on to say “six months is generally set as the “lock up” period, where insiders are prohibited from selling stock to the public. Once that constraint is lifted the prices of the stock often tanks.”

Can IPOs be shorted?

What does Malkiel mean when he says insiders?
My guess: The management can sell the shares of the company that they have after 6 months?

Why does the stock usually drop after the lock up period ends?
My guess: If I’m correct with my assumption above, it’s because it’s a bad sign to see the management cash in their stocks?

Re: IPOs
 

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Can IPOs be shorted?

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No, IPO's cannot be shorted until after they start trading publicly, unless it's a private transaction. Usually, you can't short or trade options on them until 180 days after the IPO.

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What does Malkiel mean when he says insiders?
My guess: The management can sell the shares of the company that they have after 6 months?

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Insiders are anyone who has access to the stock prior to the IPO. That includes management, employees, and pre-IPO investors such as venture capitalists.


[/ QUOTE ]Why does the stock usually drop after the lock up period ends?
My guess: If I’m correct with my assumption above, it’s because it’s a bad sign to see the management cash in their stocks?

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In most cases, it has nothing to do with management's outlook for the company's prospects. It's simply a case of good portfolio management. When a company goes IPO, people with a large stake in the company, such as founders, management and venture capitalists, all of a sudden have stock that is worth a lot of money. In many cases, that stock represents a large percentage of their net worth. So, it's just prudent portfolio management to sell some of that stock and reduce their exposure to a single security.

Once the lock-up period expires, there tends to be a lot of stock for sale from insiders who couldn't previously sell and this drives to price down.

Re: IPOs
 

Yet another reason for me to never read that book.

Re: IPOs
 

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Yet another reason for me to never read that book.

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I'd like to hear what you disagree with and why.

Thanks

Re: IPOs
 

Random Walk is by no means the only book that recommends staying away from IPOs.