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Dot com no longer translates to a hot
IPO because investors are getting pickier. Still, success stories abound, like the recent
Red Hat offering which priced at $14 and soared to $90 on the first day.
Which raises has the perennial question: How can I get in on an IPO?
Here are a few tried, true and new ways.
1. Be a heavy hitter. The traditional way to get in on an IPO is to be a
well-heeled customer at a major brokerage firm. Full-service brokers have always used IPOs
to reward their best customers, but it was a surprise to learn that user-friendly online
brokers like Charles Schwab (SCH) and Fidelity have set the IPO bar so high.
Schwab admits it reserves IPOs for million-dollar-accounts or traders who make 48 or more
trades a year. To be included in a Fidelity IPO, you need a $500,000 account or 36 trades
a year. By comparison, DLJdirect, with its $100,000-account requirement, looks positively
democratic.
2. Be persistent and lucky. If your trading account is less than six
figures, open an account at E*Trade or Wit Capital. Both promise equitable access to IPOs,
but getting shares can be a matter of persistence and luck.
At Wit Capital (WITC) any account holder can place a "conditional offer" for IPO
shares at a limit or offering price. Shares are then distributed on a equal basis, as long
as demand does not exceed supply. In an oversubscribed issue -- very likely with a hot
Internet stock -- a lottery is used to allocate shares.
E*Trade (EGRP) uses a lottery system whether or not the issue is oversubscribed. But to
get in on the lottery, you must first indicate your interest in a specific IPO, and you
can do this only during a two-hour period on a certain day. The challenge is to
find out the date and time. E*Trade specifies only a general period, such as "mid to
late July", and there is little advance notice when the actual window of opportunity
will open. E*Trade suggests you check its IPO Bulletin every day between 4 and 8 pm ET,
but skip the wrong day and you'll miss out altogether.
3. Don't be a flipper. Flip one IPO and you may be blacklisted for future
allocations.
Flipping -- selling quickly in the aftermarket -- is frowned upon by underwriters whose
goal is to make a stable market for the newly public stock. Underwriters penalize brokers
by withholding future offerings, so brokers penalize flippers.
Although neither E*Trade nor Wit Capital restrict customers from selling shares, they
offer strong reverse incentives. At E*Trade, those who flip within 30 days go straight to
the bottom of the future allocation lists. Flippers who ignore Wit Capital's 60-day
holding period are barred from future IPOs for 60 days.
4. Bid for shares in a Dutch auction. When W. R. Hambrecht & Co.
announced it would use a Dutch auction for its "open IPOs,", it appeared to pave
the way, finally, for equitable treatment of the little guy.
In a Dutch auction, shares in an initial public offering are bid on by interested
investors. The winning bid is the lowest price at which the company can sell all the
shares it wants to sell to raise the money it needs. Everyone above the winning bid are
winners, but they all pay the same price for the shares: the amount of the winning bid. In
addition, there are no restrictions on selling your shares. You can flip them like
pancakes.
Equitable? Yes, but bor-ing. Salon.com (SALN), the first online open IPO from Hambrecht,
opened at 10.50 and closed at 10. Try flipping that pancake.
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