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Initial Public Offerings, Pricing Differences

Sept. 6, 2011

There can be a large difference between the price of shares when purchased in an initial public offering (IPO) and the price for the same shares when they start trading in the secondary market (where previously issued stocks, bonds, and other securities are bought and sold) after the IPO.

The pricing disparities occur most often when an IPO is "hot" or appeals to many investors.  When an IPO is "hot," the demand for the securities far exceeds the supply of shares.  The excess demand can only be completely satisfied once trading in the IPO shares begins.  This imbalance between supply and demand generally causes the price of each share to rise dramatically in the first hours or days of trading.  The price often falls after this initial flurry of trading subsides.

You can find more information about IPOs, including why investors have difficulty getting shares in an IPO and a brokerage firm's IPO eligibility requirements.

We have provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

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