Market Indicators: The Best-Kept Secret to More Effective Trading and Investing

Chapter 14. Money In, Money Out (IPOs, Secondaries, Mergers, Buybacks, and Dividends)

	If the lady wants green shoes, sell her green shoes.
	--—old Wall Street saying

Most of this book considers the ebb and flow of investors' appetite for risk, a measurement of demand for stocks. This chapter will explore the dynamic of companies coming to the capital markets, as an indicator of stock supply.

A rising stock supply is a market headwind, often stretching available investor funds to buy additional shares coming from initial public offerings (IPOs) and secondary offerings. This chapter discusses IPO implications, stock buybacks (which reduce the number of shares available, thereby supporting stock prices), and other factors to consider when thinking of the market's supply-and-demand dynamics.

Increasing Supply—The IPO Process

For most investors, an IPO is a beginning, the first day they can freely trade a firm's shares. For the company, however, the IPO marks the end of a fairly long journey. The process of going public takes time. A company must reach a certain size and have both a sufficient operating history and a compelling growth outlook. It must be willing and able to assume the significantly higher costs and stricter regulator requirements incurred by publicly traded companies. Along the way, managers must consider and then dismiss the option of selling their company to a larger competitor or private equity firm, instead of pursuing an IPO.

A firm must then hear from several investment ...