Saturday, September 26, 2009
Manipulating the listing price - IPO investors take care
In a process called 'laddering,' IPO shares are offered to particular clients by underwriting firms under the understanding that they will purchase more shares at a specified price after the opening company begins publicly trading. These 'particular clients' are frequently executives of companies that the underwriting firm does banking business with (and wishes to do further business with). The practice of laddering tricks the market. Investors observe that an IPO stock's prices are rising and join in the trading, assuming the shares are moving at an honest rate. Laddering artificially balloons the value of a stock, making it appear to be a hot pick before investors. After the IPO stock's value rises, the client-investors often sell their shares and make huge profits. Those who are not client-investors of the underwriting firms, and thus not aware that the value of the stock has been inflated, fail to sell, and end up holding highly overpriced shares.