Hot Issue
Candlefocus EditorIn the stock market, an oversubscription occurs when demand for newly-issued shares outstrips supply. In the case of hot issues, the demand is so strong that the price of the shares can skyrocket on the first day of trading, making it attractive to speculators who want to buy and then quickly flip the shares for a profit.
Hot issues can also be a risky investment if the underlying company is unable to meet the speculator's short-term expectations. For example, a company that is unable to grow its market share quickly may be the target of “flipping” investors who purchase its shares with the hopeful intent of reselling them on the first day of trading. Typically, these investors are disappointed when the share prices soon after plunge, instead of continuing to rise as they had expected.
Companies that go public through hot issues must also consider the consequences of a weak aftermarket performance. Due to the buying frenzy associated with a hot issue, companies often experience a period of extreme overvaluation in their trading prices. If the company's performance does not back this up in the long term, its stock can quickly fall out of favor and its valuation could plummet.
Hot issues are a popular investment option among speculators, as well as long-term investors who are looking for an opportunity to capitalize on the hype of a promising company. Nevertheless, these investments come with risks that should not be taken lightly. Hot issues often require investors to dedicate significant time, money, and research to understand the fundamentals of the company in order to ensure a successful outcome.