What Is a Hot Issue?

A hot issue is a highly coveted initial public offering (IPO). Prior to the offering, the company has built up hype, whether or not deserved, and has decided to bring its shares to the public. With only a limited amount of stock available, and many investors wanting a piece of the action, the IPO garners much attention and further stokes the fires of investor demand.

Understanding Hot Issues

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 can capture 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 the founders to yield some control and early investors, including these founders, to experience their liquidity event.

Key Takeaways

  • A hot issue is a highly sought after initial public offering.
  • Biotechnology companies with promising drugs or high tech companies with innovative products are often hot issues.
  • When only a limited number of shares are available, and the stock sees large gains after its IPO, the buzz can further stoke the fires of investor demand.
  • Some investors only participate in hot issues for quick short-term gains, while others are in it for the long term.

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, when a company that investors are eager for, eventually makes it to the IPO stage, its shares become a hot issue.

How Hot Issues Work

A widely-followed company will first file a Form S-1 for its intended IPO. Roadshows often follow, sponsored by the main underwriter(s), in which key executives give slide presentations and answer questions from dozens of institutional investors, as they digest roasted chicken or grilled salmon lunches at an upscale 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 or convince the company to offer more shares.

Finally, a hot issue will price after the market close of the IPO date. The next day the hot issue will open for trading on a stock exchange. Sometimes the price of 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, some of the volatility in shares of a hot issue is driven in part by speculative investors attempting to make profits from buying and selling of shares, sometimes within seconds of the IPO. These investors do not care about investing in the company long term, but only seek quick trading profits. This can cause a hot issue to see a lot of trading volume in the early days of the IPO, which then fades as the initial excitement wanes.