The amount of buzz surrounding Twitter’s (NYSE:TWTR) upcoming initial public offering is nearly tangible. The social media platform is expected to raise as much as $1.6 billion, making it the biggest technology IPO since Facebook (NASDAQ:FB) went public in May 2012 and raised a record $16 billion — and investors big and small want a piece of the pie.
The problem is, there’s only so much pie to go around — about 70 million slices, each priced between $17 and $20 — and access to the pie is not necessarily equitable. Twitter is expected to hit the public markets in just a few days, which will make the stock accessible to the average retail investor. But before that happens — before the pie is set out to eat, so to speak — institutional investors, or those with deep pockets, get the kind of privileged access to shares that only money can buy. Relatively few investors actually get allocated stock at the IPO price, while the rest are left to buy at whatever the market commands, and history has shown that highly hyped stocks (like Twitter’s) often command enormous prices relative to actual earnings.
Data compiled by Forbes shows that of all the IPOs priced since September 12, 19 have returned over 20 percent, averaging a 69 percent gain over just a few weeks. On average, these stocks opened for trading on the day of their IPO at a price 49 percent higher than their IPO price, and only experienced 9 percent further upside on average for the rest of the day. That is, most of the gains were made on the first trade, from those relatively few who were allocated slices of pie before it’s set out to eat, to the retail investor. These few experience the vast majority of the gains attributed to post-IPO price pops. Those who have to buy in once shares actually go public earn much more modest returns (and sometimes lose out over the short term, as was the case with Facebook).
So what’s the average investor to do?