November 12, 2010

GM IPO (and all IPO's)

The news today was that the GM IPO (Initial Public Offering) is going to happen sometime next week and that most average investors will not get to participate.  Why?  Because good IPO's in demand are never allocated to individual investors.  Never have.  Never will.

I was a stockbroker for a long time and in my experience, I learned simply that the best IPO's are held tightly by the Wall Street firms that do the underwriting. The worst IPO's are distributed to anyone and everyone.  Interestingly, I could sell preferred stock via IPO all day and hide the commission, more on that in another blog post.

There is an old saying on Wall Street, ''if you can get your hands on an IPO, you don't want it''. 

IPO's are usually priced low enough so that the initial owner takes on very little risk.  The irony is that successful IPO's are flipped (sold) by their original and very temporary owner (hedge funds, mutual funds, etc) to average investors who are likely to hold and own the shares over a longer period of time which is ultimately what the underwriters (investment banks) like to see.

So why don't the underwriters (investment banks) sell to average investors?  Its simply payback time, for all the commissions that the hedge funds and mutual funds have generated.

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