What is a 'Hot Issue'

A hot issue is a highly coveted initial public offering (IPO). A company that has built up hype, whether or not deserved, may decide to go public. With only a limited number of shares available and many investors who want in on the action, the IPO will garner much attention and further stoke the fires of demand.

Also referred to as a hot IPO.

BREAKING DOWN 'Hot Issue'

A company that has developed a new and exciting technology, a biotechnology firm with a promising drug in a late-stage trial, a "sharing economy" company that is quickly penetrating markets — these capture of the imagination of public investors who await a potential IPO. The gestation period of a company prior to going public can be short or long, depending on preferences of founders to yield some control and early investors, including these founders, to experience their liquidity event. Sometimes a company may remain private either voluntarily or involuntarily, the latter case of which may be imposed upon the firm by unfavorable market conditions or changed business prospects. A fast-growing company may not be able to sustain business at levels that justify an IPO. Also, sometimes a private company is taken out (acquired) before it hits the public equity market. But if a company that investors are eager for eventually makes it to the IPO stage, its shares will become a hot issue.

The Life of a Hot Issue

A widely-followed company will first file a Form S-1 for its intended IPO. Road shows follow, sponsored by the main underwriter(s), in which the key executives give their slide presentations and answer questions from dozens of institutional investors as they pick at their roasted chicken or grilled salmon lunches at a four- or five-star hotel meeting room. Convinced that this IPO will score big gains, the investors communicate their orders to the investment bank(s) taking the company public. Only a limited number of shares are offered, so the IPO ends up being oversubscribed, which usually prompts the lead underwriter to increase the indicated price of the IPO, convince the company to offer more shares, or both.

Finally, a hot issue will price after market close of the IPO date. The next day the hot issue will open up for trading on the exchange. In most cases, the price of the shares will pop 20%, 30%, 50% or more right off the bat and continue to remain hot for a period of time. In other cases, a hot issue is merely reflective of a temporary game played by investors to secure an allocation of a popular IPO and cash in shortly after the stock begins trading, sometimes within minutes. These investors do not care about investing in the company; they want quick trading profits.

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