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.