Question: When a company goes on the stock market, what determines the stock price for the first time? — Dwayne (Clayton, NC)
Mike Norman: In a traditional IPO, the investment banks in charge of the IPO take the issue on a "road show" to various possible investors (often large mutual funds or preferred clients of the investment bank) to determine the appropriate price for the IPO. In return, these investors often receive the initial allotments of IPO shares and benefit from the price appreciation imbued in the increase between the offer price and the open price.
However, there is another way called the Dutch auction method. Unlike the traditional method, in which only the institutional and sophisticated investors are involved, the Dutch auction method enables small investors to participate in the pricing by posting the price that they are willing to pay and the number of shares that they wish to purchase. The final price of the IPO in a Dutch auction is the lowest price at which all of the shares are sold. The role of the investment bank as the middleman is minimized. Google used the Dutch aution method for its IPO last year.
Question: I had planned to build a home but found the price a little too steep. Do you think the stalled market for existing homes will also put a crimp on the price of building a new home, and hopefully bring it down? — Oakley
Mike Norman: It should. Many of the same factors that contribute to a softer existing home market, like rising interest rates and easing demand, will eventually bring down the cost of building a home as well. For an individual, however, it may be harder to get discounts on the cost of building materials as compared to a large homebuilder who can buy in huge quantities. But as home construction slows, you should find labor (contractors, roofers, etc.) willing to lower their rates.
Question: What do you think about satellite radio companies Sirius and XM Radio? They are still very young, but do you see them as potential break out stocks like a Google? — Alan
Mike Norman: Neither of the companies you mention are profitable; both burn through cash and frequently raise capital on Wall Street. Right now they are each focused on building out their programming. Sirius recently signed Howard Stern to a controversial $500 million, 5-year contract. That's a lot of money, but it will help them add many subscribers. That's the key: subscribers. If XM and Sirius are successful at signing up customers their businesses could be highly profitable, but so far that's a big "if."
Question: As we "baby boomers" are approaching retirement, we are paying more attention to the "Gatt" rate which determines the amount of our lump sum distribution. Is the Fed raising rates to reduce the amount that we will have to roll over from our company plans to a brokerage account? — Kenneth
Mike Norman: No. The Fed is concerned with maintaining an equilibrium between economic growth and price stability, not your lump sum distribution. By adjusting reserves in the banking system the Fed keeps the funds rate at a level it deems appropriate to achieve its monetary policy goals.