What is secondary market performance?
Secondary market performance is the change in the price level of a newly issued stock during a period after its initial public offering (IPO). No standard end time period is considered, but secondary market performance begins on the first day the IPO shares are publicly traded.
By looking at the secondary market performance of all IPOs over a period of time (such as in a calendar year), analysts and investment bankers can estimate the overall market demand for new issues and can thus bring forward or delay a planned IPO.
Key points to remember
- Secondary market performance is how a stock behaves for a period of time after its initial public offering (IPO).
- IPO stocks are typically very volatile during their first few months of trading.
- The price of the IPO, buyer enthusiasm or pessimism, and early earnings releases all play a role in secondary market performance.
- A secondary market report helps investors and companies analyze a stock’s performance by summarizing key metrics such as the stock’s price in previous trading sessions, initial post-IPO earnings, and company-specific news that may impact the stock in the future.
Understanding Secondary Market Performance
After an IPO, the stock price will fluctuate as investors buy and sell the stock. IPOs are usually very volatile during the first months of their existence. For company management, employees and investors, the performance of the stock’s secondary market is vital. If the company can reach and maintain a higher market Evaluation than the IPO price, equity financing can be more affordable than other methods of raising capital.
Investors should keep in mind that an IPO can only represent a small percentage of the total outstanding shares, with the remainder retained by the original investors and insiders. The bulk of the equity held by the company can be used to raise capital as the company seeks to expand and enter new markets.
Secondary market report
A secondary market report summarizes a stock’s performance in the secondary market, often listing key metrics that help analysts and investors assess the stock during its first days and months of trading. Although secondary market reports are not specifically mandated by any regulator, a company will generate and review them internally to understand demand and liquidity of their newly issued shares.
There are no set parameters as to what a secondary market report should include. It will most likely include some basic information, such as the exchange the stock is traded on, stock symbol, bid and ask prices at the close of the previous trading session and historical information from previous trading sessions. Beyond that, a secondary market report may also include a analyst coverage summarystock earnings information and company or industry-specific news that may impact the stock price in the future.
Special Considerations
When a well-known company goes public with a hot IPO, the stock price can shoot up during the first day of trading and then drop quickly. This can be the result of several factors, including a large number of open market orders followed by profit taking by buyers who were able to get their trades filled before the volume of orders caused prices to spike.
By the end of day one, it is not uncommon for an IPO to have traded in a wide range, ending near or even below its initial price. In the days and months following the IPO, investors will digest the performance of the IPO. Some IPOs rise significantly in the first days and weeks, while others drop significantly in the first days and weeks of trading.
Investors will look to the company’s IPO earnings releases to assess how the business is doing and how it might operate in the future. This will then help them determine whether they want to buy, sell, hold or short the stock.
Concrete example of after-sales performance
Peloton Interactive, Inc. (PTON) is a company that went public on September 26, 2019, at an IPO price of $29. In the first days of trading, the price fell. The stock remained well below $25 until November 1 and hit a low of $20.46 on October 23.
The closing price on October 25 (October 26 was a weekend) was $22.40, so the one-month secondary market performance was -22.8% ((22.40 – 29) / 29). By mid-November, the stock had surpassed the IPO price, and by November 26, it had closed at $30.96. The two-month secondary market performance was 6.8%. The price hit a closing high of $36.84 on Dec. 2, a 27% gain from the IPO price. By the end of February 2020, the stock was back at around its IPO price, bringing the secondary market performance down to almost 0%.
However, Peloton’s somewhat lackluster performance in the secondary market has not predict the future performance of the stock. In its first quarter 2021 earnings report, the company announced that its total revenue increased 232% to $757.9 million, driven by a 137% increase in connected fitness subscriptions and a 382% increase in digital subscriptions. The company cited increased consumer demand for its home fitness products and services during the global crisis as the reason for the surge in profits. The stock closed at $150.14 on Jan. 19, 2021, up 418% from its IPO price.