Hot Issue

A hot issue refers to a company’s stock which is soon to be launched through an initial public offering (IPO). The stock usually gains a lot of popularity among investors and is highly anticipated. Typically, this popularity causes the difference between supply and demand of the company’s shares, bonds, or other soon to be issued financial instruments.

Hot Issue companies

Hot issues are frequently offered by some startups and innovative companies, which performance isn’t well predicted in comparison to some established businesses. Hot issues usually come from high-tech industries. They’re considered to be more ambitious, progressive, and future-oriented. Therefore, this type of companies draws attention of investors.

Before the stock issuance, a company and its investment banking partners prepare all the needed documentation for the initial public offering (IPO) and organize a promoting tour for potential investors. If the company provides an extraordinary and unique product or service, it might become the hot issue warmed up by the successful promotion.

Types of investors interested in Hot Issues

Investors are motivated to purchase hot issues by different reasons. Generally, there are two types of potential investors:

1. Long-term investors who believe in a company’s potential for the future. They are interested in purchasing shares at the best price possible in order to gain more profits later.
2. Short-term investors who, in contrast to the previous group, intend to gain profits as fast as possible by using speculative strategies. This type of investors is interested in the buzz around hot issues, which helps them to sell shares at an advantageous price.

While the first group of investors is attracted to the shares’ potential value, the other one is chasing instant profits. Some aggressive speculations might come into conflict with the long-term strategy by dropping the stock price. Usually, the price of new assets gets more or less stabilized by the end of the first trading day. However, if the buzz around the new stock is too intense, the price might burst like a bubble – after the initial price spike, a spectacular fall will follow, thereby causing losses to the company, long-term investors, and some short-term investors as well. Generally, the bubble hardly predictable and isn’t profitable for anyone.

Example of the Hot Issue

Suppose that there is a company A that has invented a new advanced technology. Now it prepares for issuing shares for the first time. All the needed documentation for IPO is ready, the tour for some institutional investors gains success. The company’s shares are seen as hot issues, luring a lot of short-term as well as long-term investors. On the first day of trading, the price of new shares might rise up significantly and then fluctuate because of the high demand and popularity among investors. Luckily, the situation on the market might not lead to a bubble condition, however the risk is real.