How the 5 P’s of Marketing Can Impact an IPO

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In recent weeks I’m fielding more and more questions about IPOs, short for Initial Public Offering. This is when a company first goes public onto a stock market. Companies generally go public onto a stock market to raise capital and increase their liquidity as a company, either through the capital raised or by using the capital raised to secure possibilities that will result in greater liquidity.

First, investment firms are given the opportunity to purchase stock at the IPO price. After some time individuals who have accounts with these firms are able to purchase the stock. Almost always individuals will have to pay a higher price for the IPO shares, but in some cases may pay less as price fluctuates a lot on the date of the initial public offering.

When dealing with IPOs understand that there may be limited history you can access other than the prospectus produced by the underwriter. There are also tons of fluctuations in the stock price, as those individuals who purchased at the IPO initial price often flip their shares for a profit within a short window of time. This usually leads to the stock price falling dramatically over the first few months of being listed on a stock market.

When buying a stock on the date of the initial public offering be sure to study the company beforehand and consider being “long” on the shares (that is hold for a longer period of time) due to the fact that the shares may fall below your purchase price for a month or so.

For the purposes of an IPO lets take a look at how the 5 P’s of Marketing can impact an IPO. The 5 P’s of Marketing are: Product, Price, Place, People and Promotion.

Product: In my personal opinion this is the most important aspect of buying stock with regard to a company. If you don’t understand the products a company offers it is better to stay away from such a company until you educate yourself on the product line or the industry as a whole. Some products are easier to understand than others. For example, Wendys offers hamburgers, chicken, wraps, salads, coffee, etc. while a company like Comcast has different products in various communications areas which may be harder to identify with. It may not be necessary to understand every product, but understanding enough of the product line is important to understanding the bottom line of the company, as these products will ultimately drive sales.

Place: Understanding where a company is located is also important when jumping into an IPO. If a company is only located in a specific area, such as limited to a state or two, it is important to consider growth. Certain companies have positioned themselves to only have a market in a certain area. For example, Dunkin Donuts and Wawa are more readily seen in the areas of New Jersey, New York and Pennsylvania than they are down in the southern US. While such companies are considering expansion there are other companies that will stay in their specific area and only expand within that area. An example of this is Ocean First Bank ($OCFC) which is only in the state of NJ, but is expanded within a few counties in NJ. This is why it is important to understand how place influences growth, as a company may not be interested in global growth.

People: When discussing people this touches on a few different areas as far as an IPO is concerned. The first “people” to consider are those involved with the company: CEO, CFO, Founder, President and other important individuals. While there are usually generalized biographies of these individuals within a prospectus or corporate website it is a good idea to search for more information regarding these individuals. If these “people” have had any issues with the SEC or other negative publicity it may be a good idea to steer clear of companies these individuals represent. Other “people” to consider when deciding to purchase an IPO are those covering the IPO. When individuals such as Warren Buffett are painting a negative light of an IPO it is likely to not perform as expected. Other “people” to considering regarding an IPO are those who leak information in advance of an IPO, which generally results in an IPO failing to meet expectations. Finally, the other “people” to consider are those who are going to purchase the stock on the initial public offering date. There will be a mixture of individuals looking to make a quick buck due to the fluctuations during the first few days of listing and a combination of individuals who are looking to watch the stock grow over time. This is with every stock, but with an IPO this can heavily influence price.

Promotion: The buzz regarding an IPO can heavily impact the price reached by the end of the IPO date. Companies such as Twitter had bigger IPO dates than smaller companies due to the promotion behind it. With 24/7 media the promotion a company has will increase the stock price, as the more individuals who are aware of an IPO, the more individuals who are going to purchase shares. While television shows like CNBC’s Fast Money and Mad Money with Jim Cramer generally promote the larger companies, but an investment institution will list all upcoming initial public offerings for investors to sift through.

Price: The price shares of stock sell to bigger investors and investment firms is determined as part of the underwriting process. It is usually a projected range between a few dollars (such as $14 to $16). This evaluation beforehand will influence how the IPO goes. If an IPO’s projected price is considered too high individuals may not buy and the inverse is if an IPO’s projected price is considered too low those first offered shares may buy to a point where the public is limited in their ability to purchase common stock. Individuals will often study a company in advance of an IPO and determine how much they are willing to spend per share. Individuals will also set aside funds to participate in an IPO. Individuals will limit their spending to this amount. It is better to have money set aside for an IPO and have a price target in mind. For example, setting aside $2300 for an IPO and purchasing shares at $46 a share is going to be a better plan than setting aside $100 when the IPO price could exceed that price.

So the next time you see an IPO you’re interested in do your due diligence with studying a prospectus, setting aside funds for the purchase of shares and establishing a target price in your mind. Don’t overreach on this target price, as you may be able to hit this target price in the upcoming days due to investment groups selling off shares for big profits!

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