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What is a ‘hot issue’?
A "hot issue" is an IPO that is in heavy demand. In such a case the indications of interest from prospective purchasers received by the broker-dealers underwriting the issue far exceeds the number of shares that the issuing company plans to sell. For example, if Hot Biotech Inc. proposes to issue 5 million shares of its stock at $12 per share, yet there is a demand for 10 million shares, that is a "hot issue".
Once the stock is issued, their share price of the shares would be expected to rise well above the $12 offering price, because some of those who wanted to buy it at $12 and could not get any would go out into the market to buy it at higher price. Extremely hot issues have been known to double and triple the same day, so the same shares that were sold at $12 in the morning, would be selling for $36 by the end of the day.
While sometimes the issuing company is able to increase the number of shares it will be selling to reflect the heavy demand, or raise the price at which it offers shares, generally this will not dampen enthusiasms for a very hot issue. Of course, sometimes the demand has been whipped up far beyond the true value of the shares, and although they may show a dramatic short term rise, they may quickly fall back to approach or go below the original offering price. Other times they keep on climbing. |
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