Stock markets are one of the most popular and busy markets in the world. Traders, economists, politicians and general public watch the stock markets closely because they can basically show us what condition a given economy is in. You can tell whether it is in uptrend (bullish sentiment), a downtrend (bearish sentiment), or we can even gauge if potential bubbles are being created.
First of all, we need to understand how the whole process works. Raising capital is one of the main purposes of financial markets and that is what companies are pursuing when they announce initial public offerings (IPOs). Basically they are opening doors to general public, thereby inviting us all to share their future fate, whether it might be a success or a failure.
The issuing company usually works with an underwriting firm which guides them through the IPO process. Large investment banks are performing this underwriting job: Credit Suisse, Morgan Stanley, and BofA Merrill Lynch were the leaders this past year. They would help determine the number of ordinary and preferred shares, the starting share price which will be offered to the public, and basically determine the whole IPO strategy.
What we really need to understand is what happens to markets when IPOs are announced. IPOs are first offered to institutional investors, and then sometimes to clients of underwriting firms. By the time average retail traders can get their hands on the stock, it is already on the secondary market. Therefore, we need to be aware of the psychological perceptions of market participants. These depend on fundamentals, and they move share prices during the first days of an IPO. As technical analysts, we at the Academy of Financial Trading will be watching closely to see whether a proper trend is being created, in order to provide an element of entry confirmation.