Just trying to put the "Elite" back in ET... Are IPOs available to short sell immediately upon trading, or is there a time limit that must pass before short sales are accepted? The quick answer to this question is that an IPO can be shorted upon initial trading, but it is not an easy thing to do at the start of the offering. First, you have to understand the process of IPOs and short selling. An initial public offering (IPO) happens when a company goes from being private to being publicly traded on an exchange. The company and an underwriting firm will work together to price the offering for sale in the market and to promote the IPO to the public to make sure there's interest in the company. Generally, shares in the company are sold at a discount by the company to the underwriter; the underwriter then sells it on the market during the IPO. When an investor short sells, he or she essentially borrows a stock and repays it in the future. If you do this, you're hoping the price of the stock will fall because you want to sell high and buy low. For example, if you short sell a stock at $25 and the price of the stock falls to $20, you will make $5 per share if you purchase the stock at $20 and close out the short position. To be able to short a stock, you usually need to borrow it from an institution such as your brokerage firm. For them to lend it to you, they need an inventory of this stock. Here's where the difficulty can arise with IPOs and short selling: an IPO usually has a small amount of shares upon initial trading, which limits the amount of shares that can be borrowed for shorting purposes. On the day of the IPO, two main parties hold inventory of the stock: the underwriters and institutional and retail investors. As determined by the Securities and Exchange Commission, which is in charge of IPO regulation in the U.S., the underwriters of the IPO are not allowed to lend out shares for short sale for 30 days. On the other hand, institutional and retail investors can lend out their shares to investors who want to short them. However, only a limited amount of shares would probably be available on the market as the company would've just started trading publicly and the shares may not have been completely transferred. Furthermore, there might be a lack of willingness among investors to lend their shares out to be short sold. So, while there are regulatory and practical obstacles to doing it, it is still possible to short sell shares in a company the same day the company goes public. http://www.investopedia.com/ask/answers/05/062905.asp
IB allowed shorting today (first day I've been able to get a borrow). I placed a (very) small short position and then looked at the indicative borrow rates (IB passes through the cost of borrowing shares, not sure if other brokers eat this cost). Anyway, borrow rate was 100% annualized! I quickly closed out my position for a virtual breakeven trade. One more reason not to short this puppy. Oh, and there were 8000 shares available to borrow at that point.
Yeah, thats what, $5 a day to short. The folks that shorted yesterday when it dropped $10 barely made a profit.
Nope, 100% annualized across 365 days (you know you pay on the weekends, right?) is about $0.30 per day, per share. But for a 100 share lot, that would be $30/day. Ridiculous price, never seen a borrow fee that high.
First off, thanks for taking the time to explain. Assuming the LinkedIn IPO went this way, let me know if I'm seeing this right: LinkedIn would have sold those shares that were being auctioned to GS at a discount. They were projecting a valuation of $45, so GS would have bought at a discount to that price right? Maybe $42, or somewhere in there (total guess on my part, but the actual number is not important). The point is, LinkedIn has already sold those shares. So when the stock starts trading on the exchange and the price shoots up to $80, $90, $100...it is GS that is making huge profits on those shares, right? It must be bittersweet for the LinkedIn shareholders to see the stocks they still hold shoot up in value, and yet realize that they could have probably sold to GS at a much higher price on the shares they have unloaded for the IPO.
olias, Something like that. The terms of an IPO can vary so much from one IPO to the next. Remember that the insiders, (board members etc.) usually hold shares also. So they want to see the shares rise in value. Some more info other then my word... Lock-up period â The time period after an IPO when insiders at the newly public company are restricted by the lead underwriter from selling their shares. Usually lasts 180 days. Selling stockholders -- It's usually a bad sign when a large number of shares in an IPO come from selling stockholders, meaning pre-offering investors who are cashing out. Not only does it mean that the company won't receive the money from the sale of those shares, but it also should make one wonder why investors would want to sell their shares so quickly if a company's prospects are strong. In fact, investors usually prefer that management retain a sizable stake in the firm after the offering is completed. The number of selling stockholders is found in a section called "The Offering," while management's total stake can be found in "Principal and Selling Stockholders." http://moneycentral.hoovers.com/business-information/--pageid__1962--/global-msn-index.xhtml I would have to assume that the insiders have shares and are not regretting the price appreciation.
Just to add.. the prospectus page 139 "In order to facilitate the offering of the Class A common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Class A common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the Class A common stock in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this offering, the underwriters may bid for, and purchase, shares of Class A common stock in the open market to stabilize the price of the Class A common stock. These activities may raise or maintain the market price of the Class A common stock above independent market levels or prevent or retard a decline in the market price of the Class A common stock. The underwriters are not required to engage in these activities and may end any of these activities at any time. " So while everyone thinks they're the first to discover a profitable short trade, the underwriters may well have shorted at $120+ and covered with the over-allotment or purchase at market and burning all who got in-between. Why do retail investors think they're going to beat the market makers is beyond me.
Indeed, as i've said many times, Wall Street is comprised of liars, cheaters, and thieves. Never buy an IPO retail!