A:

The quick answer to this question is that an IPO can be shorted upon initial trading, but it is not an easy thing to do at the start of the offering. First, you have to understand the process of IPOs and short selling.

An initial public offering (IPO) happens when a company goes from being private to being publicly traded on an exchange. The company and an underwriting firm will work together to price the offering for sale in the market and to promote the IPO to the public to make sure there's interest in the company. Generally, shares in the company are sold at a discount by the company to the underwriter; the underwriter then sells it on the market during the IPO. When an investor short sells, he or she essentially borrows a stock and repays it in the future. If you do this, you're hoping the price of the stock will fall because you want to sell high and buy low. For example, if you short sell a stock at $25 and the price of the stock falls to $20, you will make $5 per share if you purchase the stock at $20 and close out the short position.

To be able to short a stock, you usually need to borrow it from an institution such as your brokerage firm. For them to lend it to you, they need an inventory of this stock. Here's where the difficulty can arise with IPOs and short selling: an IPO usually has a small amount of shares upon initial trading, which limits the amount of shares that can be borrowed for shorting purposes. On the day of the IPO, two main parties hold inventory of the stock: the underwriters and institutional and retail investors. As determined by the Securities and Exchange Commission, which is in charge of IPO regulation in the U.S., the underwriters of the IPO are not allowed to lend out shares for short sale for 30 days. On the other hand, institutional and retail investors can lend out their shares to investors who want to short them.

However, only a limited amount of shares would probably be available on the market as the company would've just started trading publicly and the shares may not have been completely transferred. Furthermore, there might be a lack of willingness among investors to lend their shares out to be short sold.

So, while there are regulatory and practical obstacles to doing it, it is still possible to short sell shares in a company the same day the company goes public.

(For more on the topic of short selling, check out our Short Selling tutorial. For more on IPOs, see our IPO Basics tutorial.)

RELATED FAQS

  1. How do corporate actions affect floating stock?

    Learn what floating stock is, and find out about some of the actions a company may take to affect the amount of the company's ...
  2. What are the advantages and disadvantages of listing on the Nasdaq versus other stock ...

    Discover some of the primary advantages and disadvantages that exist for companies listed on the Nasdaq exchange rather than ...
  3. What securities does the primary market deal with?

    Find out what kinds of securities are traded on the primary market, including who can participate in trading and the basics ...
  4. What types of companies hire a chartered financial analyst (CFA)?

    Find out which types of firms typically employ chartered financial analysts, what positions CFAs frequently hold and which ...
RELATED TERMS
  1. Bear Closing

    Purchasing a security, currency, or commodity in order to close ...
  2. Crowded Short

    A trade on the short side with an overwhelmingly large number ...
  3. Gross Exposure

    The absolute level of a fund's investments.
  4. Lloyds Organizations

    An insurance syndicate that bases its organizational structure ...
  5. David Einhorn

    Known for his short selling strategy, activist investor David ...
  6. Short Call

    A type of strategy regarding a call option, which is a contract ...

You May Also Like

Related Articles
  1. Professionals

    The Coming Stock Market Decline: What ...

  2. Active Trading Fundamentals

    How To Short Amazon Stock

  3. Trading Strategies

    Profitable Long-Term Consolidation Patterns

  4. Stock Analysis

    Kohl's: Does a Broken Stock Mean a Broken ...

  5. Personal Finance

    Top Spots to Wine and Dine Clients in ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!