On the first day that a stock begins trading in the public markets, the security may experience the best percentage gains that the issuing company ever sees. The markets and investors get excited about new money entering the stock market, and if prospects for an IPO are good, that makes for an even bigger splash on the first day. Despite that first-day bump, IPO performance is affected by several factors. Market conditions, profitability in other competing companies, and the investment community's perception of the new issue all influence trading performance in an IPO.
IPO performance can be measured in individual companies or in a series of companies that issue shares in the public markets for the first time during a season. If a string of IPOs are issued, and performance in those stocks is disappointing, it could lead another company waiting in the wings for its debut session to stall the offering. On the other hand, if investors are welcoming new issues and sentiment surrounding the stock market is positive, more privately held companies may decide to go public because IPO performance has been rewarding.
Media hype can affect IPO performance. Market psychology plays into investor behavior, and if financial commentators and authors are not confident about a new stock, the sentiment can very easily spill over to the markets. If the media anticipate an IPO with positive comments, demand in the new issue could surge, and this will affect IPO performance to the upside.
Sometimes, an overseas company will begin trading its shares on another country's stock market, a security known as an American Depositary Receipt in the U.S. When this occurs, investors may not be familiar with the new issue set to trade in the public markets. If the analyst community, however, uses a platform of some type to compare the international stock with a successful domestic business that investors are well aware of, this could make the international stock popular before it even begins trading in the new market.
The size of a new issue can affect IPO performance too. If there is a particularly large new issue that is planning to trade in the public markets, the stock will likely get a lot of attention from the media and financial analysts alike. Offering size could create increased demand for the issue because investors see the confidence that company executives and investment bankers involved in the IPO have on the deal.