To understand this issue, let us first understand the IPO Process and short selling. In an Initial Public Offer (IPO), a private company is going public and raising money by offering its shares to the general public for the very first time. Hence, the word, “Initial”.
Now, comes the other part, short selling.
The term short sell means that an investor is bearish on a stock and selling them at a higher price without actually owning them. The process actually includes borrowing these shares from someone who already has those shares and places a sell order on them.
If the investor’s expectations are met and the price of the stock goes down, he gains a profit by buying them at a lower price.
Coming from the concept discussed above, can it be applied to your IPO investments as well.
When a company has just launched its IPO, it becomes extremely difficult to short sell IPO shares of that company.
The reason behind it is simple, and that is that there is no inventory of those stocks with the broker.
Since the shares have just been launched, there are very few sources which can give those shares to the investor who wants to borrow them in order to short sell them.
Moreover, whenever an IPO is launched, there are usually a small number of shares upon initial trading.
On the day of the launch of IPO, inventory of the stock is mainly held by the underwriters (hired in the process of launching the IPO) and institutional investors. Underwriters cannot sell their shares for a certain amount of pre-decided time just after the IPO launch. And, the institutional investors are also unwilling to lend their shares out.
So, while it is not completely impossible to short sell IPO, but definitely a very difficult task to be able to do so.
Thus, it is suggested that you stick with the mainstream IPO investments only where you bid for an IPO based on your research and you get lots based on the IPO performance.
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