"Floating" a Company in a Bull Market

There are two trends in the stock market: bull market and bear market.

The bull represents the optimistic sentiment of most investors' capital towards the stock, while the bear represents a pessimistic sentiment.

Simply put, bear investors believe that the overall price level of the stock market is going to go down in the near future and so they are selling their holdings, thus fulfilling their own prophecy and causing the stock market price level to go down. In contrast, marginal investors believe that the overall price level of the stock market is going to rise in the future and therefore they are acquiring holdings, thus fulfilling their own prophecy, causing the stock market price level to rise.

Of course, a bull market and a bear market cannot exist at the same time - one always prevails over the other. Who is currently overcoming whom? It is simply possible to open an index that represents an average of the price level of the shares of the best companies in the economy. If the index falls over a period of months, we are in a bear market. If it exceeds a period of months, we are in a bullish market.

So far regarding the bull market and the bear market, and now we will discuss the first public offering of shares on the stock exchange.

An initial public offering on the stock exchange (also known as an "initial public offering", or IPO) is an act designed to raise money for the company.

Basically, the two main details in any financial transaction are "how much value I give, and how much money I get". In any case, a company that is interested in making a public offering will be interested in giving as few shares as possible in relation to the total number of shares intended for sale, for as much money as possible in return. Starting from this point of view, one can begin to understand why all the first issues will be in a bullish market only.

In a bullish market, where the general price level of stocks is on a steady upward trend, investors holding most of the capital for investment are considered optimistic about the future of the stock market. Hence the potential investors of the company wishing to make a public offering will on average be more optimistic about the forecasts of the company's performance, hence they will agree to pay higher prices for the right to participate in this performance (i.e. buy shares in the company).

Simply put, in the bull market potential investors are more "wasteful" in terms of the prices they agree to pay for the stock, and they see the companies' forecasts in pink glasses. They are more likely to believe the optimistic forecasts of the company itself, which are often published in an inviting and enticing wording, with the (legitimate) intention of selling as many shares as possible.

Is it worth buying first issues of new companies on the stock exchange?
There are several reasons why the answer to this question is 'no'.

First, in principle, marketers entrusted with marketing the initial public offering do so because they receive a generous commission for their services. This means that these shares are sold in the first place at a higher price than they could have been sold had it not been for this marketing commission. In addition, whenever stock market marketers receive a generous commission, their marketing becomes more aggressive.

Second, the sale of a first share issue to the public takes place in two stages, with the first stage being a sale at a fixed or almost fixed price to the institutional investors and the particularly large private investors. In the second stage the stock reaches the stock exchange and is sold to the rest of the "small investors" public, in many cases at a much much higher price than the same price given to investors in the first stage. The "small investors" hardly profit from the same initial jump in the share price. The big gainers are people with huge fortunes and institutional bodies, who manage a lot of money belonging to the public.

Third, historically, many were the first public offerings that crashed in borrowed grief. As of this writing, 2021 was a year with a particularly large number of issues, many of which fell by many tens of percent of their initial issue price.

Ben Graham said that "all investors should beware of new issues - rigorous scrutiny and exceptionally stringent tests before buying them."

Charlie Manger, a partner of Warren Buffett, one of the world's biggest investors, once said that when looking for investment stocks, they divide all the "candidates" into three baskets: 1. "Yes", 2. "No", and 3. "Too hard to understand." He added that initial public offerings (IPOs) are immediately thrown into the "no" basket.

Nevertheless, it should be recognized that certain professional investors, with expertise, know how to analyze initial public offerings and consistently make a handsome living from exactly this niche.