With LinkedIn‘s (LNKD) monster IPO surge this morning, we should ask if this means that it was let down by its underwriters. Bear in mind that the offering range was already raised by about 30% just before it was priced. If you price at $45 and the stock soars to $90 or so, that means the company left all the money on the table.
Or maybe not. At Business Insider, Pascal-Emmanuel Gobry writes:
In fact, it’s probably because they were AFRAID of having a pop that they upped the price early on to mop up demand.
But here’s the thing. Along with designer handbags, stock is the only good where demand goes up with price.
Economics 101 says that when demand for something limited is high, the price will go up, which will lower demand to match the supply. But that’s not how the stock market works, is it? When the price gets high, more people buy, and the price gets higher.
Excitement about the LinkedIn IPO was always high but it started becoming feverish after LinkedIn’s underwriters bumped it up to 40. “There’s so much demand! It means it’s going to be a huge IPO!” Which, of course, became a self-fulfilling prophecy. A person close to big investors told us that they couldn’t even get shares in the IPO because it was so oversubscribed.
There’s a frenzy because there’s a frenzy -- which in turn leads to a bigger frenzy. This is why I steer clear of most IPOs.