Cash in on the Internet IPO Investment Revolution trade IPOsonline."Whatever business you are in, the one common thread is thatinformation is power. In this book you will find out how to get itand then how to use it for profit." from the Foreword by David Menlow, President,IPOfinancial.com"Bust open that smoky back room and let the IPO Guys show you howthe individual investor can play the IPO market." Jay Sears, Senior Vice President, EDGAR Online, Inc."Any investor desiring to participate in IPOs need look no furtherthan this fantastic book. Zito and Olejarczyk have done atremendous service to individual investors by clearly explaininghow to participate in the IPO market, from basic IPO participationto sophisticated investing techniques." Corey E. Ostman, Chief Technology Officer, Alert-IPO!"Trade IPOs Online is an excellent primer for the novice onlineinvestor." Scott Ryles, President and Chief Executive Officer, EpochCapital Partners
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About the Author
MATTHEW D. ZITO is an entrepreneur, individual investor, and IPOtrader. He has been featured in The Wall Street Journal, HomeOffice Computing magazine, and the Washington Post, and isPresident and CEO of Ski & Sand Travel, Inc., andSkisavers.com.MATT OLEJARCZYK is an individual investor, IPO trader, andlogistics and efficiency consultant. He is founder of OleyEnterprises, which assists individuals and philanthropicorganizations. Together, Zito and Olejarczyk founded theipoguys.com financial-based Web site, which is dedicated to helpingeducate individual investors about the new opportunities availablethrough investing online.
Table of Contents
Introduction.The Internet Investing Revolution.IPOs, the New Investment Vehicle.IPO Performance.Internet IPOs.Preinvesting Preparation and Research.Getting Started.Why to Buy IPOs.Secrets, Software, and Technology.IPOs and the Future for Online Individual Investors.Appendix: Traditional Discounting of IPO Shares.Epilogue: IPO Surgeon General's Warning.Notes.IPOguys Terminology.IPO Glossary.Index.
What People are Saying About This
Bust open that smoky back room and let the IPO Guys show you how the individual investor can play the IPO market. (Jay Sears, Senior Vice President, EDGAR Online, Inc.)
Trade IPOs Online is an excellent primer for the novice online investor. (Scott Ryles, President and CEO, Epoch Capital Partners)
Any investor desiring to participate in IPOs need look no further than this fantastic book. Zito and Olejarczyk have done a tremendous service to individual investors by clearly explaining how to participate in the IPO market, from basic IPO participation to sophisticated investing techniques. (Corey Ostman, Chief Technology Officer, Alert-IPO!)
It all started one day during the fall of 1998 in the offices of the Software Colony in Camp Hill, Pennsylvania. I was there pitching my newest brain trust idea--Skisavers.com--looking for venture start-up capital to fund my fledgling Internet company. It was my second appointment with Jan Rumberger, one of the founders of the Software Colony, and he had invited a well-known entrepreneur in the south central Pennsylvania area, Steve Schoffstall, to meet me. Steve was a cofounder of PSInet, one of the largest Internet service providers in the country. Steve, who had recently moved to south central Pennsylvania after cashing out of PSInet, was looking for his next Internet adventure.
We all hit it off, and for the next two months, I met with Steve regularly for lunch to explain my progress with Skisavers. com. During these meetings, I learned the inside process that Internet companies go through in raising capital prior to going public. The entire process ( I'll call it "the game") was unlike anything I had ever experienced before; it was an eye-opening introduction to high-tech Internet life.
My wife, Nicole, and I had started two successful companies before, but we had never raised capital from outside sources, especially venture capitalists. Over the next 3 to 6 months, I developed the business plan for Skisavers.com, researched the competitors, and talked to potential clients. I soon discovered that two companies in Silicon Valley were already developing the same technology I had envisioned. I also soon learned that ski resorts, my main source of revenue, were reluctant to have anything to do with the Internet, let alone pay a start-up for something they thought they could do themselves. The ski resorts didn't want to spend a dime.
As the game continued and I furthered my research, I fell upon a Web site called Red Herring (redherring.com). I was researching venture capital resources and saw a banner ad for Wit Capital that read something like "wanna be like a venture capitalist" "buy ipos online." I thought "wow," what an opportunity. I knew what an initial public offering was because the development of Skisavers.com was intended to lead to an IPO that would be the "pot of gold" at the end: the company would turn public raising millions of dollars. Today, many Internet entrepreneurs are becoming millionaires and billionaires through taking their companies public.
My wife and I have been investing since we were 22 years old, mainly in mutual funds and big blue chip stocks. I had never heard of an avenue for investing in IPOs the way the venture capitalists do. Like most people, I thought this "party" was limited to investors with $1 million or more. I visited the Web site and saw that Wit Capital was offering to sell "initial shares" in many Internet companies that were coming public. The companies going public were similar to what I was trying to build in Skisavers.com. My wife and I decided to open an account at witcapital.com.
While I was developing Skisavers.com, Matt Olejarczyk, a colleague and friend, had showed an interest in starting his own business Shortly thereafter, he started sharing some of his ideas for Skisavers.com. I would send him my business plan, and he would review it for me. I then told him about how I had set up an account with witcapital.com. After following a few companies on paper (paper trading), he became convinced that there was a huge opportunity invest in initial public offerings. Because Olejarczyk put a lot of time into researching and developing software and Internet utilities that would help us gain an edge over other potential IPO investors, we were successful in obtaining shares in more IPOs than we knew what to do with. We had gone from standing ankle-deep on the water's edge to diving headfirst into the IPO ocean. We thought we had better take advantage of this incredible new investment opportunity while we still could. Little did we know, it was only the beginning.
It was January 14, 1999, around 7: 30 P. M., and we both had just received reconfirmation e-mails from Wit Capital for a new issue named Marketwatch.com (CBS Marketwatch). We had read the prospectus a few weeks earlier, researched the company through various IPO Web sites, and decided we were going to try to buy 100 shares of the new issue at $17.00 a share. Total cost for 100 shares was $1,700.00.
A lot of positive hype surrounded the company, and the technology market was booming. We both reconfirmed our original conditional offer for 100 shares of Marketwatch. com. That evening we were extremely excited because we knew that the shares would start trading the next day a lot higher than our original $17.00 a share purchase. I don't think we slept real well that night; in fact, I know I didn't because I got up around 4: 30 A. M. to see whether I had received an allocation.
I went to the computer, logged in, and downloaded my e-mail. There it was, an e-mail from Wit Capital; the words in the subject header read "NewIssueAlertMKTW." I knew the e-mail was some-thing important--at least I hoped so--considering that I hadn't slept all night in anticipation of this very moment. As I clicked on the message, I saw that I had in fact been allocated 100 shares in MKTW (CBS Marketwatch. com). Figure I. 1 shows a sample e-mail confirmation.
I talked with Matt Olejarczyk that morning, and sure enough he also had been allocated shares in Marketwatch. com. Matt was so excited I am pretty sure he dedicated his entire morning to sit-ting in front of the computer just so he could see what the stock would start trading at that morning.
About 11: 30 A. M. the next day (Friday, January 15), my wife and I were coming back from the hardware store with supplies to fix up our fly-fishing lodge. The cell phone rang and it was my mother-in law, Irene. She could barely speak, but she finally got it out, "Matt, Marketwatch is trading at $92.00 a share." I was stunned. We had just paid $17.00 a share the night before, and now it was trading at $92.00 a share.
- Figure I. 1 E-mail Confirmation
Source: Sample e-mail confirmation from Wit Capital. Used with permission.
Dear Matt Zito:
Wit Capital hereby accepts your conditional offer in the amount of 100 shares of Marketwatch.com Inc.
Common Stock. The offering has been priced at $17.00 per share.
Trade date: 1/ 5/ 99
Settlement date: 1/ 20/ 99
You will receive a confirmation by mail containing further details of this trade.
Nicole first said, "Let's sell it. I don't think we have ever made $7,500.00 in less than 24 hours on 100 shares of a stock." Although we decided not to sell that day, we did end up selling half of our initial 100-share investment, 50 shares, at $81.50 a share five days later. That was a profit of $3,225.00 in less than 5 days (50 shares of the IPO only cost $850.00). This was exciting.
CBS Marketwatch. com ended up number six on the all-time list of first-day performers during the 1999 calendar year, with a first-day gain of 474 percent. Even though we were thrilled beyond belief that day, we realized that the run would not last. Not every IPO was going to go up 474 percent.
To make money investing in and trading IPOs online, we were going to have to make it our business. Investing in IPOs takes discipline and commitment. You must take the time to do your homework, and also realize that you cannot gain significant wealth overnight. So Matt Olejarczyk began researching software and technology that would help us to obtain IPOs at the offering.
Together, we have participated in the purchase of over 35 IPOs in 1999. A majority of the new issues have been winners, big winners, while a few IPOs have not fared as well. Yet overall, we have never seen such a consistently lucrative investing opportunity. Trading IPOs does not guarantee a profit. This investment vehicle is extremely volatile over the short term, and highly risky over the long term. But IPO investing is like anything else in life; when you seek high returns, you must also accept a higher level of risk. Matt and I also believe, however, that hard work, commitment, and dedication can offset much of the risk in this endeavor.
I hope we got your blood pumping, or at least piqued interest in initial public offerings. Maybe you have already heard enough about IPOs to know that you want to know more. Either way, you're ready to get started.
We are going to take you through the same process we followed in learning how to trade IPOs. The first, and probably the most important, step as you begin your IPO investing journey, is to build a solid foundation. In Chapter 1, we describe how the Internet has spawned a whirlwind of change in the investing and financial industries. This will help you understand how the Internet created an opportunity for the individual investor to obtain IPO shares at the offering price. We refer to these changes, and time frame surrounding them, as the "Internet Investing Revolution."
After you understand the events that created this new opportunity for the individual investor to obtain shares at the offering price, we begin to discuss the IPO in detail. In Chapter 2, then, we cover the capital formation process and discuss IPOs as a new investment vehicle.
Once you know how the IPO typically performs in the market, you will have greater success in your investing and trading strategies. Therefore, in Chapter 3 we look at IPO performance. In Chapter 4, we detail specifically the Internet IPO and show you why the best current IPO investing opportunities lie in Internet-related IPOs.
Every IPO investor will appreciate Chapter 5, probably even more so after you begin trading IPOs and can look back at it in hind-sight. In Chapter 5, we recommend preinvesting research and preparations for anyone who even considers getting involved in trading IPOs online. In Chapter 6, we get to the heart of actual IPO investing. Here we walk you through the process, from setting up an account to deciding what trading strategies to use once you've been allocated shares.
Once you know how to set up an online account, then you need to find out where to open one. In Chapter 7, we highlight which online investment banks currently sell IPOs to individual investors so you can decide where to take your money. Next, in Chapter 8, we provide insight on leveraging software and information technology to assist in the purchase of IPOs online. Finally, in Chapter 9 we discuss the future of IPOs and online individual investing.
The IPOguy fights for access to IPOs for the individual investor. The IPOguy is a knowledgeable, responsible, shrewd, and dedicated individual investor. True to his entrepreneurial spirit, he takes his investment decisions seriously.
The IPO is a new investment vehicle for the individual investor. Access is now open. The IPOguy is willing and ready to take you on a journey that will demystify any previous notions you may have had about IPOs. We hope this journey will increase your knowledge about the possibilities for trading or investing in IPOs. The IPOguy will pop up throughout this book. He should not be taken lightly. Wherever he makes an appearance, please take special note.
The IPOguy welcomes you in the fight for access to the coveted IPO.
Now it is time to HIT IT!Chapter 1
The Internet Investing Revolution
A revolution is taking place . . . right now . . . in front of our very eyes, just beyond the thousands of pulsating light pixels per square inch on our computer monitors. Commonly referred to as the "information revolution," the Internet will directly or indirectly impact every aspect of our lives. Whether it's a new technology that transmits data faster than ever before, or a consumer-based Web site that sells products at 20 percent to 40 percent below traditional "brick and mortar" stores, the Internet Revolution will affect you as a consumer in one way or another. And like the industrial revolution, this new revolution will change our lives forever.
We use the term "revolution" because it most accurately reflects the incredible rate of change that is taking place in the financial world as a result of the Internet. Over the past couple of years, the world has embraced the Internet as an efficient and effective means to organize and make available high-quality investing information to the general public. Take a look for yourself. A wealth of information is available on the Internet to facilitate smart investment decisions, and much of it is the same information used by professional brokers.Expert Information
Historically, the traditional brokerage firm's primary value has been expert investment decisions that result from having access to quality information not readily available to the general public. With the Internet, however, the individual investor is armed with just as much quality information as the "experts." The Internet takes that information power and places it in the hands of the individual investor. This has been the primary reason for the growth of online brokerage accounts.The Individual Investor
Having high-quality financial information available over the Internet has allowed people to better understand their investments, track their investments, do their own stock analysis, and develop their own investing strategies.
Enter the scene online brokerage firms that allow people to perform stock trades online, at a much lower cost than that charged by traditional brokerage firms. It makes sense. Why pay a broker an enormous commission for research and trade execution, when you can research and execute the trade yourself, at a fraction of the cost?
The result is that individuals are taking responsibility for their financial situation and investing for themselves. People are using the Internet as their expert information source and are no longer willing to let a broker handle all their investments. Persons who invest a portion of their money for themselves over the Internet are referred to as an "online individual investor."The Shift to Online Investment Accounts
Many people have opened online investment account(s) hoping to make returns that equal or exceed those of a broker. How many have opened accounts so far? "The percentage of U. S. investors trading online is now about 12.5 percent and is expected to climb to 29.2 percent by 2002. About 12 million of those households now have online accounts, and those folks are making more than a half-million trades a day."1 footnotes not included in sample chapter
If those statistics don't boggle your mind, try these: "A June survey by Gomez Advisors, Inc., a Lincoln, Massachusetts, Internet research firm, and Harris Interactive Inc., A Rochester, New York, market-research firm, found that 4.6 million online investors had traded at least once in the prior 6 months. And despite fears of a slowdown in online trading activity, the survey found that 16.3 million more people were poised to begin trading online."2
This is not a fad, but a revolution that will change the face of investing forever. And this is just the beginning. E-commerce is expected to reach over 1.3 trillion dollars before the end of 2003. It is estimated 100,000 new Internet accounts are opened every day, and the number of online accounts doubles every 60 days.
Our aim here is to avoid getting hung up on numbers, because they are always changing. If we focused only on the numbers, we would have to revise this page of the book every 60 days or so because that is how fast the estimates seem to change. Our goal here is simply to give you some facts and figures that reveal the significance of the revolution taking place in our homes via our computers.Impact on Traditional Brokerage Firms
Traditional brokerage firms such as Morgan Stanley Dean Witter, Fidelity, and most recently Merrill Lynch (to name a few) have noted this phenomenon and jumped online, or developed software aimed at the individual investor, in an attempt to garner a portion of this ever-growing market. An educated, online investor is the reality of the future, and a growing portion of the individual's discretionary income will be allocated to these online accounts, most likely at the expense of traditional brokerage firms.The Motivation of the Individual Investor "Making the Big Score"
The lure of making it big has always drawn people to drastic measures. For example, during the California Gold Rush of 1848Ð 1849 fortune seekers from all over the country traveled West hoping to strike it rich. America's fascination with gambling is another example. According to some analysts, gambling addictions have reached epic proportions. Casinos in Las Vegas and elsewhere lure countless hopefuls through their doors, and there seems to be no sign of a deteriorating market. In fact, the latest battle has been how to keep gambling offline. If people actually believe they will win money consistently at the casinos, then why would they not believe that they have better odds at making a fortune by investing for themselves?
If you have a gambling habit, beware! You should not, in any way, confuse individual investing with gambling. Investing your hard earned dollars in the stock market is not even remotely related to gambling. Sure you could pick any old stock by rolling the dice, and hope for a winner. But this book is not about getting lucky. It is about careful planning and smart investing in new market opportunities. Our culture's preoccupation with money can easily blur the lines between "investing" and "gambling" for many people.Bad Experiences with Past Brokers
Another reason some people have taken to investing for themselves is that they have had bad experiences with a broker. Either they lost some money in their investments, or maybe they just watched their money make a nominal return while the rest of the market reached record highs. Maybe this has happened, or is still happening, to you.
Or maybe you just want to become a little more involved in managing your money, because, let's face it, no one cares as much about your money as you do. So you are going to open an online account. Whether you inform your other broker that you are doing some individual investing needs to be your personal decision. Only you know how good your relationship is with your broker. Keeping them "in the loop" on your personal investing activities could be mutually beneficial. However, when it comes to your broker losing some of your money to an online trading account, relationships tend to go sour. That has been our experience anyway.
Most of the brokers from the traditional firms have advised us against any sort of online personal investing activities. If I could have a dollar for every time a traditional broker advised me to "stay away" from online trading, or told me that I was "gambling," I could feed myself for at least a couple of weeks. "You 're gambling,"-- that's my favorite. If you have never been hit with that one yet, consider yourself lucky.
Some individual brokers at the traditional brokerage firms have been sheltered from understanding the impact of the online financial revolution and they just don't "get it" yet. Other brokers, who understand all too well the dramatic effect that the Internet is having on the investing public, will advise you against any involvement in it and tell you to leave it up to the "professionals."
We hope you will find this is more often the exception than the norm, although our personal experience has proven the reverse true. But we remain optimistic that in the long term, the traditional brokerage firms will survive and thrive through the chaos, and will continue play a critical role in the financial and investing sectors. Our vote is for developing educated and informed investors, not for leaving investors in the dark. While there are many brokers who will do a decent job for you, you will never find a broker who is as committed about your investments and your financial future as you are.
The reality today is that you need to take individual responsibility for your investments, whether you let a full-service brokerage firm handle your investments, or decide to do it on your own, or more likely combine both strategies. You never know when you have a second-rate broker until it is too late. So it is important that you take responsibility and at a minimum learn basic "investing talk." When you can intelligently discuss your investments with your broker, you can start making the most out of your hard-earned nest egg. Further, you may have more peace of mind knowing that your investments are "in synch" with your investment objectives.Expectations and Objectives
The motivation to open an individual account is not always based on a bad experience. Maybe your expectations are just a little different from those of a traditional brokerage firm, perhaps a little higher than what is considered to be the standard. Table 1.1 shows a standard, textbook risk versus return chart that summarizes the average return by traditional investment type.
This table may be representative of what the "average" investor is able to achieve. But the individual investor does not settle for average results. Instead, we use the newest developments and strategies in the area of personal investing to outperform the aver-ages. We will discuss one such strategy, trading IPOs online, beginning in Chapter 2.Improved Control
The online trading tools and resources that are in place enable the online individual investor to make informed investing decisions and see immediate results. No longer do you have to leave a voice mail with a broker that you want to trade a stock, then hope that the transaction maximizes your profit. Or watch your stock tumble due to a recent news announcement while you wait on hold for your broker, who is on the other line. No longer do you need to guess where you rank on your broker's priority list of clients. You can place your market order and, within seconds, view your completed transaction. Controlling the money that you worked so hard to earn brings a level of satisfaction and independence that can only be understood by the online individual investor.
|Table 1.1 IPO Classic Long-Term Risk versus Return|
|Expected Long-Term Performance (%)|
|Low-risk (bonds/ CDs)||3||5||7|
|High-risk (single stocks)||10||14||32|
Last but not least, you need to carefully consider the time factor. Some people simply don't have the time required to do their own investing. Make no mistake about it, to succeed in the world of investing, you need to be able to dedicate time to this endeavor.
If you have enough time to do some research and want to take more responsibility for your financial future, an individual online investment account might be just the thing for you. If you already have your own individual investment account, or if you plan on opening one in the near future, we are going to show you how to make money through your individual investment account by investing in IPOs.Summary
*The Internet is shaking up the financial community by arming the individual investor with quality financial information, empowering us to make our own investing decisions. People are realizing the importance of taking responsibility for their financial future and becoming more actively involved in their investment decisions.
*It is important that you take responsibility for your financial future by actively participating in your investment decisions. Whether you invest for yourself or have someone else invest on your behalf, your level of involvement and investing knowledge will directly affect your financial success. One of the new and unique investing vehicles available to the online individual investor is the IPO.