Pre IPO Insights
Hot IPO Stocks

27 June 2022

Hot IPO: Definition,How it Works, Examples and More

Hot IPOs attract investors who believe their demand will surpass the total shares offered. Initial public offerings whose demand exceeds supply are said to be oversubscribed. Short-term speculators in San Francisco usually target oversubscribed initial public offerings. Read on to learn more about hot IPO

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What is Hot IPO?

An initial public offering with a significant demand is a hot IPO. These initial public offerings are widespread and gather high amounts of interest from the media and fintech investors like Chime before the firm becomes a public company. Hot IPOs generate attention and hype, which results in a considerable rise in growth stock prices once the organization goes public. These IPOs are risky, especially if the involved company has a poor record of success. 

Pros and Cons of Investing in Hot IPOs

Pros of Investing in Hot IPOs

Potential for High Returns

Hot IPOs often generate significant investor interest, leading to a surge in the stock price during the initial trading days. Early investors may experience substantial gains if the company performs well in the market.

Access to Innovative Companies

Hot IPOs typically involve companies with groundbreaking technologies or disruptive business models. Investing in such companies allows investors to be part of innovative ventures with the potential for future growth and success.

Early Investment Opportunity

Investing in a hot IPO provides the chance to buy into a company at an early stage before it becomes widely available to the public. This early investment opportunity can be attractive for those seeking to capitalize on the company’s future growth.

Cons of Investing in Hot IPOs

Volatility and Uncertainty

The IPO market is known for its volatility, and the stock prices of newly public companies can fluctuate significantly in the short term. Investors should be prepared for potential price swings and market uncertainties.

Limited Historical Data

Newly public companies may have limited financial data and operating history available for evaluation. This lack of information makes it challenging to assess the company’s long-term viability and predict its future performance accurately.

Potential Overvaluation

Hyped IPOs can attract excessive investor enthusiasm, leading to overvaluation. If the stock price surpasses the company’s actual value, it may result in a price correction, causing losses for early investors.

Lock-up Period Restrictions

Insiders, including company founders and early investors, are usually subject to lock-up periods, during which they cannot sell their shares. When the lock-up period expires, a flood of insider selling could impact the stock’s price negatively.

Allocation and Availability Issues

Retail investors may find it difficult to secure shares of hot IPOs due to high demand and limited allocations. Many shares are often reserved for institutional investors or high-net-worth individuals, making it challenging for the general public to participate in the initial offering.

What Stocks are Hot to Invest in?

The stock market traded at peak highs across 2021, maintaining its power from 2020’s second half. The IPO market has maintained good performance to date. While investor opinions could be changing with the expected rise in interest rates, there are various hot IPOs in the market, and others will hit the market soon.

Last year set a record in the initial public offering realm. Wall Street and Bloomberg set clear records with the overall IPOs that entered the markets and the total amount raised. The beginning of the trading year in 2022 was not very friendly, meaning upcoming IPOs will face hostility across the year. However, numerous first-class private companies are fit for inauguration on one of the biggest exchanges by the end of the year. Here are some of the most awaited upcoming hot IPOs to watch out for in 2022.

· Robinhood Markets

Robinhood (Nasdaq: HOOD) was among the most awaited IPOs in 2021. The online brokerage firm is among the most popular in the private equity world. Its commission-free stock trades and user-friendly mobile interface have attracted numerous millennial investors. It has also boosted the meme stock demos in AMC Entertainment (Nasdaq: AMC) and triggered a rise in cryptocurrency prices.

Robinhood has sufficient numbers to support the hype. In 2021’s first three quarters, there was more than 120% rise in revenue. Funded accounts were over 20 million by the end of 2021’s third quarter. These numbers have been doubling annually. Despite the powerful debut, the stock has fallen, leaving many people doubting its potential to become a significant performer in cryptocurrency. Some core metrics dropped following the Dogecoin boon during 2021’s second quarter.

Robinhood introduced crypto wallets towards the end of 2021, demonstrating its willingness to embrace innovations. The regulation threat and controversy still uncertain the company’s future. Still, investors believe the company will continue changing the way they invest.

· Coinbase

The cryptocurrency explosion was established in April 2021, with the debut of Coinbase, the most significant cryptocurrency exchange in the United States. It was also the first core crypto business listed on the public markets.

Coinbase went public via a direct listing. The approach is akin to an initial public offering; it allows a venture capital company to skip the share trading phase and avoid paying underwriters. The stock starts trading on an exchange at a pre-established price, enabling existing equity holders to dispose of their shares.

Coinbase’s stock price initially surged during its launch, moving from the $250 reference price to more than $430 during its first trading days. However, the stock’s prices dropped in the following weeks and have remained low. Investors can expect the value of Coinbase to be closely connected for the uncertain future to that of popular cryptocurrencies like Bitcoin ETFs and Ethereum. 

· Roblox

Roblox is an online gaming platform that went public during the first quarter of 2021 via the direct listing, and its stock gained value in the following weeks. Roblox doesn’t develop the games, but it operates a platform that allows interested parties to build video games.

By September 2021, Roblox had attracted over 8 million onsite developers and more than 45 million daily active users. Roblox experienced tremendous growth during the Covid-19 pandemic when bookings rose by more than 170% in 2020 against 2019’s 39%. However, the company’s management says growth will drop as the pandemic wanes.

Still, the platform business model has been successful for other firms and should do the same for Roblox. The firm has various competitive advantages like structural restrictions to entry and network effects, which are expected to support its long-term growth.

· Instacart

Instacart, a leader in the online grocery delivery world, is expected to go public sometime in 2022. An IPO has been forthcoming since Apoorva Mehta, the CEO, announced the firm’s intentions in September 2019.

In November, the company said it was halting its plans to go public to expand its business. Still, Instacart is likely to announce an IPO soon. The company experienced exponential growth during the pandemic. During a $39 billion valuation the company held in March 2021, it raised over $260 million, demonstrating that an Instacart IPO would be a big debut. 

· Reddit

Reddit, a popular message and social media board site confidentiality, filed for an initial public offering in late 2021, indicating that it would be among the most significant upcoming IPOs in 2022. According to private funding rounds, its valuation has risen in the past few years to hit $3 billion and $10 billion in 2020 and 2021, respectively.

Final-stage private investors usually speculate that a possible IPO will trigger a solid upside. When Reddit chose Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) as core underwriters for its IPO in January, it’s said to have been seeking an over $15 billion public valuation. Following the tough tech stocks beginning in 2022, Reddit must compromise on its optimal valuations. 

· Discord

Discord is an application that provides instant messaging, video, and voice calls. The company has experienced fast growth, with its monthly active users rising from 56 million to more than 135 million in 2020. According to the Wall Street Journal, Microsoft approached Discord in 2021 to discuss its buyout for $10 billion. However, the deal flopped. during a funding round held in September 2021, the company’s valuation was $15 billion.

· Stripe

Stripe, a digital payments firm, is the most profitable privately-owned tech start-up in the United States. It is one of the most awaited IPO today. While it is yet to announce its plans to go public, it has taken the initial steps to debut in the market, bringing along a law firm to walk it through the process, according to Reuters.

The wire service also expressed the company’s plans to go public through a direct listing instead of a traditional initial public offering because it doesn’t plan on raising funds. Stripe offers cloud software, allowing businesses to process payments seamlessly. During its funding round in March 2021, the company’s valuation was $95 billion. Following this massive valuation, a listing is forthcoming. Insiders and early investors want the company to go public to liquidate its holdings.

· Rivian

Electric vehicles have continued attracting high valuations since Tesla’s stocks skyrocketed in 2020. The firm became the most recent interested party in investing in the sector after going public in 2021. The electric vehicle company’s market cap rose briefly beyond $150 billion before dropping. Rivian had nearly zero revenue before initiating its IPO.

The firm is willing to sell up to 100,000 delivery vans to Amazon. It counts Ford and Amazon as its most significant investors. Rivian is increasing the production of its R1T pickup truck, is planning to release 40,000 vehicles this year, and targeting 1 million in ten years. The electronic track has gathered rave reviews, and its stock might compare to Tesla’s if Rivian builds a similar dedicated fan base.

How Hot IPOs Work?

When a company is launched, only one person or a group owns it. One of the strategies private companies use to raise money is through going public via an initial public offering. They can collect a substantial amount of money within a short time if the issue receives public attention, becoming a hot IPO. Initial public offerings enable private companies to utilize the demand for their stock. The company can use the proceeds to finance expansion, repay debt, or invest in facilitating future growth. 

Before initiating an IPO, a company enlists the services of an investment bank or financial institution to evaluate the possibilities for a profitable IPO on its stocks. One of the investment banks will play the role of an underwriter for the suggested issue. The underwriter assists the company in setting the price per share. They could offer some shares to an individual or institutional investors of their volition.

High demand for stocks during an IPO triggers an increase in stock prices soon after it starts trading. The sharp rise is usually unsustainable and indicates a price decline that can have a massive impact on the market. 

Steep price moves affect initial shareholders once trading launches on the secondary market. Underwriters could give special treatment to high-value customers during a hot IPO so they can suffer some risk should they overprice the stock. Rapid price volatility once a trade opens could affect early shareholders in the secondary market.

Reasons for Launching Hot IPOs

Companies go public for various reasons, as seen below. 

· To Raise Funds

The core goal of launching a hot IPO is to raise funds. Companies can issue share capital to raise funds for expansion and growth. When investors subscribe to the shares, the company collects a substantial amount from the market, allowing the company to meet some of its financial needs. A company can collect enough funds to reduce its debt burden by listing securities. 

· It’s an Exit Route for Existing Investors

The shares of numerous private firms are held by some stakeholders like private investors or the organization’s promoters. Suppose such investors want to liquidate their stake entirely or partially. Launching an IPO could provide a solution. The company’s current investors could give out their shares to the public via an Offer for Sale and dispose of their claims to the public. 

· To Gain Marketability and Liquidity of Shares

The New York stock exchange is a hub of trading securities. As a result, listing allows an institution’s shares to participate in their trading activity. Eventually, the shares become liquid and easily marketable, motivating investors to own shares in the company. 

· To Win the Trust of Stakeholders

When an organization is listed, it must comply with the rules set by the market regulator, SEBI. The regulator controls the organization’s financial disclosures, corporate activities, and trading activities. That eliminates the possibility of fraud or malpractice, enabling the organization’s stakeholders to trust its management and operations. 

· To Enhanced Visibility 

Listing creates brand awareness. Companies grab the attention of analysts and investors during an IPO who assess its technical and fundamental aspects. That builds the company’s public profile and can boost its reputation and goodwill in the market. Through an IPO, a company becomes competitive because its share price mirrors the market perception. Suppose the company succeeds. Its shares will be in demand, boosting the share price, helping it to raise its market capitalization and become a reputable brand. 

What makes Hot IPO Stocks?

Five different steps are involved in the IPO process. A company planning to issue its shares should work with one or various underwriters. Here are the steps to a hot IPO

  • The issuer chooses an underwriter and works on an agreement
  • The issuer works with the underwriter to outline a prospectus and record the offering with the U.S. Securities and Exchange Commission
  • The underwriter organizes roadshows to advertise the offering and its management to prospective investors
  • The underwriter calculates the offering’s final price once SEC authorizes it
  • A lock-up period follows after the launch of the training. Institutional investors are blocked from selling their holdings to the public during this phase. Doing so prevents a possible price destabilization or run on the stock. 

Companies considering issuing stock through an IPO should take time to plan. They should consider underlying issues, including executive compensation, corporate planning, corporate structure, bylaws, and corporate charter. 

Often, issuers work with established investment banks with a chain of institutional investors because they are conversant with the issuer’s business. Such banks track and maintain a market interest for the firm planning to sell shares on a public stock exchange. 

Strategies for Managing Risks and Setting Expectations

Managing risks and setting expectations in hot initial public offerings (IPOs) is crucial to ensure informed decision-making and mitigate potential losses. Here are some strategies to consider:

Thoroughly research the company

Before investing in a hot IPO, conduct extensive research on the company, its business model, competitive landscape, financial performance, and growth prospects. Review the prospectus and other available information to understand the risks involved.

Assess valuation

Evaluate the IPO’s valuation and consider whether it aligns with the company’s fundamentals and growth potential. Excessive hype and inflated valuations can lead to short-term price volatility and potential corrections.

Understand the risks

Identify and understand the risks associated with the IPO and the company’s industry. Consider factors such as market competition, regulatory challenges, technological disruptions, and potential economic downturns. Assess the company’s ability to overcome these risks and sustain long-term growth.

Diversify your portfolio

Avoid putting all your investment capital into a single IPO. Diversify your portfolio across various sectors and asset classes to reduce exposure to any one company or industry. This strategy helps spread the risk and minimizes the impact of potential losses.

Set realistic expectations

Hot IPOs often generate significant hype and media attention, which can create unrealistic expectations of immediate price appreciation. Understand that IPOs can experience significant price volatility in the early days, and the stock’s performance may not always align with initial enthusiasm. Set realistic long-term expectations based on thorough analysis and the company’s growth potential.

Consider a staggered investment approach

Instead of investing your entire capital upfront, consider a staggered investment approach. This strategy involves dividing your investment amount into multiple tranches and investing them over a period of time. This approach allows you to take advantage of potential price fluctuations and make more informed investment decisions.

Stay informed and be patient

Keep abreast of news and developments related to the company and its industry. Monitor financial reports, regulatory updates, and market trends. Additionally, exercise patience and avoid making impulsive decisions based on short-term price movements. Focus on the long-term prospects of the company and reassess your investment thesis periodically.

Consult with a financial advisor

If you are uncertain about investing in a hot IPO or managing the associated risks, consider seeking advice from a qualified financial advisor. They can provide insights tailored to your specific financial goals, risk tolerance, and investment horizon.

General steps you can take to participate in a hot IPO

Participating in a hot IPO (Initial Public Offering) can be an exciting opportunity to invest in a promising company during its early stages of going public. Here are some general steps you can take to participate in a hot IPO:

Stay Informed

Keep an eye on the financial news, industry reports, and investment websites to stay informed about upcoming IPOs. Pay attention to the companies that generate buzz and are expected to have high demand.

Open an Account

If you don’t already have one, open a brokerage account with a reputable brokerage firm. Ensure that the brokerage you choose offers IPO access to retail investors.

Check Eligibility

Some IPOs may have specific eligibility criteria, such as a minimum account balance or trading activity. Review the requirements set by the brokerage firm to ensure you meet them.

Research the IPO

Gather information about the company going public. Read its prospectus, which provides details about the business, financials, risks, and future prospects. Analyze the company’s fundamentals and evaluate its potential for growth.

Express Interest

Once you’ve identified an IPO you want to participate in, express your interest to your brokerage firm. Some brokers have specific IPO request processes, such as online forms or dedicated IPO hotlines. Follow the instructions provided by your broker to indicate your interest in the IPO.

Confirm Allocation

If you are allocated shares in the IPO, your broker will notify you about the quantity of shares you’ve been granted and the price at which you can purchase them. This information will be communicated before the IPO goes live.

Place Orders

On the day of the IPO, place your purchase order through your brokerage account. Ensure you have enough funds available to cover the cost of the shares.

Monitor and Adjust

After participating in the IPO, monitor the performance of the stock. Consider your investment strategy, risk tolerance, and long-term goals. Make adjustments to your holdings as necessary.

Oversubscribed vs. Hot IPOs

Investors seeking hot IPOs anticipate the demand for publicly traded shares to surpass the supply. Offerings with higher demand than the total shares provided are referred to as oversubscribed shares.

Short-term investors are attracted to such IPOs. Trading price declines occur during the initial trading day following the high demand for shares. Organizations manage such scenarios to ensure their initial public offerings appear successful. The potential of an underwriting is based on the trading price, size of the IPO and the total interest in the shares.

When done correctly, the alignment maximizes profit for the issuer and the investment bank. An underpriced IPO experiences a price drop once the shares start trading before the market adjusts to the immense demand. The underwriter can’t align supply and demand by issuing more shares because the registration statement contains the fixed number of shares to be issued.

Examples of a Hot IPO

Facebook’s IPO is considered a hot IPO. At the beginning of 2012, experts suggested that the social giant’s long-awaited initial public offering could trigger a significant investor interest. Th IPO sought to raise approximately $10.6 billion by disposing over 337 million shares at between $28 and $35 each.

The experts’ prediction was an oversubscribed IPO. When the market launched in May 2012, investors’ demand for the company’s shares surpassed the supply. To leverage the oversubscribed IPO and satisfy investor demand, Facebook increased the total shares to 421 million. The company also increased the price range to between $34 and 38 for each share. Together with its underwriters, Facebook raised the supply and IPO price to meet demand and reduce the oversubscription. 


A hot IPO is one of the most compelling offerings that produce fast results. Companies launch an IPO for various reasons, as we have learned in this article. If you are an entrepreneur thinking about launching an IPO for your company, use the tips in this article as a guide to actualizing your plans. 

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