Retail Investors in IPOs

It is reported that Facebook may allocate stock in their IPO to retail investors.

Without commenting on Facebook at all here, I would like to say a word about retail investors in IPOs.

You can divide retail investors into two camps -- the traders and the holders.

The traders are sophisticated and generally get allocations of new issues because they have active accounts. They have a short time horizon and are morel likely to flip. The problem for the underwriter is that giving IPO to these accounts rewards loyalty but the stock. The behavior of the traders is much that of any hedge fund that plays these markets. They flip.

This is perhaps why you see many new issues go to a premium and then decline. The underwriter creates enough demand to get the stock to a premium, the flippers flip and the stock gets soggy.

Can you say Zynga?

It does not help that companies try to engineer their results to be at a peak when the public offering becomes effective and then, having gathered a ton of money, they relax.

The retail buy and holder investors are not flippers, they are true believers. Now it may be that a buy and hold strategy wins in the long run, but it is a slow and sure way to wealth.

There is one circumstance where retail investors can be stampeded into selling -- the bear raid. The classic example of this would be when Vonage opened up their initial public offering to their customers who could buy over the Internet. They bought in droves, making the offering a success initially. However, the shorts saw that these retail, unsophisticated investors could easily be stampeded and they took the stock down. In classic bear raid fashion, the retail investors panicked and sold at much lower prices. The result was not pleasant for Vonage as the plaintiffs' attorneys who specialize in securities, ever eager and also smelling blood in the water, jumped into the fray with lawsuits, further aiding the short sellers.

This underscores the importance of  keeping your IPO stock price up -- hopefully by underpricing a bit it so something is left on the table for the public.  Nobody ever sued a company for a stock that went up.

Litigation also presents a risk for those looking for value in "fallen angels," those stocks that are down 50% of the issue price.

In summary, retail investors, those who buy and hold are friends of the company, unless they are stampeded out. Traders help the stock get to a premium, but then they can be a bad effect on price as they tend to sell fast. .