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Snap IPO insights – How to trade the big new tech stock

Snap Inc, the makers of world-renowned photo app Snapchat, debuted on the stock market this week to a frenzy of activity. Touted as the biggest social media IPO since Twitter, it has had traders and investors in a lather as they look to turn a quick profit on the newly-listed stock. Here we look at the other major IPOs of recent times, how they fared and different strategies for trading profitably on brand new stock.

Many new companies hit the stock market every year but only a handful of them have the global media salivating and mainstream investors nervous with excitement. Snap is most definitely in that category. The column inches dedicated to Snap’s public offering have been steadily growing over the past six months and, now the stock is live, investor fever is past boiling point.

It’s getting hot in here

It’s no wonder financial markets get over-excited when a giant household name goes public. The brand name and the product is familiar, so it’s easy for the proverbial man on the street to take a view on which way the company will go, no matter how ill-informed that view might be. And such incredible volume of interest and speculation – sometimes wild speculation – can be the breeding ground for quick trading profits. Just look at what happened with the Twitter IPO in November 2013.

Back then, popular opinion had it that Twitter stock on day one was going to be your golden chance to invest early and at a great price in this new breed of tech company. Twitter’s IPO was hailed a momentous success, raising $1.8 billion, with the share price of $26 valuing the business at an incredible $26 billion. On day one of trading the opening share price was $45.10. Within an hour that had rocketed to $50 before immediately settling back to $44 levels and finally ending the day at $44.90.

It was a crazy day of trading, with half a billion shares bought and sold in the first two hours alone, and there were no doubt some big winners and some big losers – not least those who got blinded by the stock tickers and mistook Tweeter for Twitter. Shares in the little-known Tweeter Home Entertainment Group Inc, a bankruptcy consumer electronics firm, shot up from 5 cents to 13 in early trading as over-eager investors leapt before looking.

It doesn’t always follow, but a big, high-profile IPO like this can generate enormous price swings in the first hours, days, weeks and even months of trading. Twitter is a good example in point, but there are plenty of others too. Here are the 5 biggest IPOs of all time.

  1.    Alibaba Holdings Group (NYSE:BABA), the famous online firm based in China, went public in 2014 at an astonishing $21.8 billion. Four days later, underwriters exercised an option to sell more shares, bringing the total IPO to $25 billion.
  2.    ABC Bank, one of China’s five largest banks, took a bow on July 7, 2010 at an initial offering raising $19.228 billion. The total was over $22 billion.
  3.    ICBC Bank fetched a total of $19 billion in 2006.
  4.    NTT DoCoMo (NYSE:DCM), hit the markets in 1998 raising $18 billion. Underwritten by Goldman Sachs Asia, this IPO launched NTT to the third largest market cap for a Japanese company.
  5.    Visa Inc (NYSE:V) rounds out the top five. The card processing company raised nearly $18 billion in 2008, despite the global financial crisis.

Back to the future                                            

Snapchat isn’t quite in the same ball park as these heavy-hitters but 2016 was a dry year for IPOs so by recent standards it’s one of the biggest and, for other specific and fascinating reasons, it’s very high profile.

As we’ve discussed, the familiar household brand name alone generates much buzz across media outlets and among novice investors. But Snap is also of huge strategic importance. The success or failure of a company like Snap could be a big signal for the future fortunes of other tech and social media giants who may be looking to go public over the next few years – mega-names like Uber, Pinterest, Dropbox, Spotify and Slack.

Trading strategies for new stock      

All this introduces a lot of question marks and doubts into the mix when you’re trying to come up with a trading strategy. So where to begin? Whether you’re looking short term or long term, start by gauging initial demand. Is the offering over-subscribed? Was it at the top end of the range? Is there rumoured to be any subsequent listing as a result of high demand? Do your research on the finance pages and have a look at eToro’s network of six million traders around the world to assess their sentiment of where the value may lie.             

On day one of trading after an IPO, the stock can often follow one of two paths in the secondary market. Some stocks shoot up for the first 15 to 20 minutes as keen buyers start chasing perceived value. Other stocks will start trading down immediately, as nervous shareholders who bought in at the opening price want to sell and secure at least minimal gains.

But whichever the direction of travel, there is a tendency for the stock to settle into a more comfortable range around an hour after opening. Some traders will watch the five-minute bars during this settling period and look to buy as the closing bars come down consistently, or sell as they go up.

Some traders will wait weeks or even several months before entering the market for new stock. A common reason for this is they’ll want to see what happens after the initial lock-up period. This is the time in which underwriters and individuals associated with the company are not allowed to sell. Once the lock-up period is over, you may see the market flood with shares, causing the price to drop significantly. Or if very few sell and the price stays constant this could be a good sign to buy.

Join the action! Trade on Snap stock today

To start trading CFDs on Snap stock today, sign up to eToro and join our six million global traders and investors. You can get started with a risk-free virtual account, and you can watch our top traders to monitor their strategies and copy their trades if you like what you see.

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