Hot Issue

What Is a Hot Issue?

In finance, the term "hot issue" is used to describe an impending initial public offering (IPO) that is especially famous among the investing public.

Hot issues are normally oversubscribed by investors, implying that their demand outstrips their supply. In those instances, numerous speculators might be drawn in by the prospect of short-term speculative gains as opposed to being persuaded of the company's long-term prospects.

How Hot Issues Work

At the point when a company is setting itself up for an IPO, its executives and investment banking partners will take the company on a so-called "roadshow", visiting several institutional investors trying to advance fervor for the new issue. In some cases, such as when the company is seen as a leader or disruptor in a thrilling new industry, these roadshows occasionally succeed in delivering widespread interest in the new IPO.

Commonly, investors interested in a hot issue will be split into two basic camps. In the first group are those who really trust in the company's long-term potential, and wish to buy in on the ground floor. Then again, numerous investors are drawn to hot issues simply because they accept they can buy and afterward flip the shares for a short-term gain. This sort of speculative enthusiasm can sometimes deliver bubble-like conditions, sometimes to the impairment of longer-term investors.

In theory, any sort of company could turn into a hot issue while going through an IPO. In practice, notwithstanding, this phenomenon is commonly associated with cutting edge companies or those participated in otherwise glamorous industry sectors. Established companies in mature industries tend not to draw in the same level of investor enthusiasm, perhaps because their business models are more stable and unsurprising than their hot issue peers.

Real World Example of a Hot Issue

XYZ Corporation is a successful biotechnology startup that is planning for its IPO. With the assistance of its investment banking partners, XYZ successfully files Form S-1 with the Securities and Exchange Commission (SEC), a necessary first step in the IPO process. Then, at that point, it proceeds to meet with a wide assortment of institutional investors to present the defense for their company and justify a desired IPO valuation.

On the off chance that XYZ is successful in its investor presentations, it could face a situation where its IPO is significantly oversubscribed. In this situation, its IPO would be seen as a "hot issue", with long-term and speculative investors vieing for the limited number of shares on offer.

Albeit the genuine price of the IPO is set after the market close on the IPO date, the share price will frequently change significantly on the next day. On account of hot issues, it is normal for the share price to climb significantly — sometimes by twofold digit percentages in a single day. Despite the fact that it is in no way, shape or form guaranteed, this historical phenomenon has empowered the propensity of speculators to bid up hot issue IPOs in the hopes of securing a large short-term gain.

Highlights

• Hot issues frequently draw in speculators who expect to buy and flipping the oversubscribed shares for a short-term gain, frequently on the exceptionally next day following the company's listing.
• A hot issue is an impending IPO that is intensely oversubscribed by the investing public.
• It is normally associated with companies in glamorous or cutting edge industries.