For the Docs who wanna buy DOCS
June 29, 2021
Tonight is the NIGHT OF PRICING
So get your toilet paper ready…
Tonight, between 6PM and 12AM EST, the Doximity IPO price will be announced. (Again, all dates are subject to change)
This means that between 6-12, you’ve got to confirm your IOI with Fidelity. That means that you must confirm how many shares you’d like to purchase. If you don’t confirm tonight, then your shares will be canceled.
Once the price is announced, you’ll know how many shares you can purchase based on your budget, and the maximum investment is capped at $5000.
So, how do you decide how much money to invest? I’d like to take you through an exercise that we do as traders when we’re deciding how much stock to buy and compare that to how we decide to buy stocks for investing. I’m not trying to turn you into traders, I’m trying to educate you on how stocks work, so that you can be confident investors.
What’s the difference between trading and investing? The timeframe and the decision making process: if you’re holding a stock for a day to weeks, this is trading. If it’s months to years to never, then it’s investing. If you’re investing, you decide to buy a stock based on the company’s performance, but if you’re trading you decide to buy a stock based on the stock’s performance.
This is a good opportunity to point out some caveats and differences between deciding to buy an established stock, that’s been trading for a while and has a track record, and an IPO stock, which has never traded publicly before.
So let’s start with investing:
If you’re investing, then you make most of your decision making up front, when you’re actually deciding whether or not to purchase the stock. You are trying to determine whether you think the company will become more valuable over time, because when you buy stock, you’re buying a share of the company, AND its future earnings potential. The information you use to help you decide is data based on the company’s performance. What are its earnings? Is it consistently profitable? Does it offer dividends? If so, are they increasing or decreasing? Does the company offer a product or service that’s trending, popular, in demand, and has the potential for continued demand?
This type of information is called “Fundamental Analysis”. This information is available for companies that have never been publicly traded—and you’ll find that in the prospectus that a company submits to the SEC when it wants to offer stock for the first time. (link to Doximity’s prospectus)
If a company has been public for a while, you can find this information on many websites, for example, finance.yahoo. Just search the company’s ticker symbol and you’ll get all the info you need.
Here’s an example using Apple. Here’s an overview of its performance, and then you can look at “financials” for more information on how the company is doing overall.
When you buy a stock as an investment, I do think it’s important to have a general plan for how long you want to keep it, and where you would draw the line if the price drops—knowing this ahead of time will keep you from selling low in a panic.
Now, if you’re making a trade, you decide to purchase the stock a little bit differently. Since you’re not in it for the long haul, you don’t need to think futuristically about how the company will do over years and years. You want to predict how its stock price (not necessarily the company’s performance) will move over the next day, few days or weeks. The information you use to decide this is data based on the stock price’s performance, which is measured and displayed on a chart. When you analyze data from the stock’s chart, this is called technical analysis. So, in contrast to Fundamental Analysis, you base your decision to purchase the stock on how it’s performing in the market. This is data that is totally absent with an IPO. That’s why IPOs for trading are a crap shoot. Not really an attractive thing to trade, since you have no data upon which to make informed choices.
When you make a trade, you must decide your plan for the trade before you make it. You don’t buy it and then “just see what happens”. You plan your trade and trade your plan.
What you want to know before entering the trade is:
-What is my timeframe for this trade? Is it a day trade or a swing trade?
-What is your risk? How much money are you willing to risk losing in this trade? This should be no more than 1% of the total amount of money in your brokerage account. That way, if you do sustain a loss, it’s limited to 1% of the money in your account. It won’t devastate you or hobble you. Losses are to be expected, so your loss must be limited.
-In order to limit risk, you need to decide when you will exit the trade. That is called your “stop”.
-Next, you need to decide when to take profits. This is based on the ATR, or Average True Range. That’s the average amount that the stock price moves up and down from the current price. In my training, I’ve been taught to set the first profit target at 2-4 ATRs. At that point, you take 50% profits, so you sell half, and then set a new profit target. With an IPO, we have no ATR, we have no guess as to how high it could go, so it’s hard to determine a profit target. We also have no past performance to see how high or low it’s gone before, which would help in determining reasonable profit targets. In this case, time is an important factor. If you think it could go up $2 / share, for a profit of $500, and you’d like to take that on the same day, then day trade it. If you hold onto it for longer, it may go up much more. But your money is also tied in for longer (an opportunity cost).
Once you know the timeframe, you set your stops and decide your profit targets and you buy the stock. Then you watch it to see what it does. Hopefully, you make a profit, but if you don’t and the trade goes against you, your stop kicks in and you exit the trade.
That’s it in a nutshell. All of these skills take years to hone, and even then, you’re always learning, so I don’t mean to oversimplify things. Again, I want you to understand the overall concepts here. When you enter a trade, your main question should be, what is my risk? (Not how much do I want to make?)
So, I’d like to demonstrate the difference between trading and investing using our Doximity example, so that when you confirm your IOI tonight, you’ll know your plan going in. You’ll know exactly how much money you’re willing to risk.
Since we don’t know the price yet, but the prospectus has given an expected range of $20-23 per share, let’s keep our example simple and use a $20 share price and a $5000 maximum investment.
If the share price is $20, and the maximum investment is $5000, then
$5000/$20 = 250. That means we can purchase 250 shares of stock for $5000.
Now, let’s determine our risk.
250 x $20 = $5000 This is our starting purchase.
If the stock price goes down by $1 to $19 per share, and we hold 250 shares, then the new value of our position is $4750 (250 x $19 = $4750) and we have lost $5000-$4750 = $250.
If the stock price goes down by $2 to $18 per share, and we hold 250 shares, then the new value of our position is $4500 (250 x $18 = $4500) and we have lost $5000-$4500 = $500.
Here is a table that gives further examples:
|Stock Price ($)||New Value of Position ($)||Loss (Risk) ($)|
So, as you can see, if the stock price drops by $1, we lose $250 (because we have 250 shares, and 250 x $1 = $250). If the stock price drops by $5, we lose 250 x $5 = $1250.
What is an acceptable risk? Less than or equal to 1% of the total amount of money in your brokerage account.
$250 is 1% of $25,000 so that means that if you have $25,000 in your account, you should risk no more than $250, which means that if the stock price drops by $1 to $19, you’re out. You would set your stop price at $19.
|Stock Price ($)||New Value of Position ($)||Loss (Risk) ($)1%||Account Size|
Now, let’s look at the flip side. How much profit you could make. (I know I said that’s not your goal when entering a trade, but I think it’s important to see and understand.)
|Stock Price ($)||New Value of Position ($)||Gain (Profit) ($)|
If the stock price goes up by $1, to $21, then the new value of the position is $21 x 250 = $5250, and the profit is $250.
So, off of your $5000 investment, you have made $250, which is return of (250/5000) x 100= 5%.
Which brings me to my next point: the role of Time.
Time plays an important factor. The shorter you hold the stock, the smaller the price moves, and the smaller your profit. In order to make a bigger profit, you’d have to purchase more stock. When you purchase more stock, you take on greater risk. And that’s trading in a nutshell right there!
In our case, purchasing more stock is not an option. Our maximum investment is limited to $5000. So, our profits over the short term will be modest, because the price usually won’t swing up so high in a short period of time. So, with a capped amount of shares and a total lack of stock performance history, and therefore, not much data to determine a trade plan, this situation does not lend itself to day or swing trading. That said, if the price shot up by $10 on opening day, with a limit of 250 shares, your profit would be $2500, which equates to a 50% return in 1 day. (2500/5000) x 100 = 50%. $2500 isn’t a ton of money, but that’s actually pretty great for a day’s work. The question is, could you make more if you held it longer?
If you held the stock for a longer period of time, as an investment, you’d potentially have the opportunity to make more profit, given that the stock price would have a longer amount of time to increase. But how long would that take? And what if Doximity shits the bed in the meantime?
The risk is that if Doximity underperforms, becomes irrelevant, gets knocked out by its competitors, or meets any of the fates laid out in its Risk Factors portion of the prospectus, the stock price might stagnate, or take forever to rise to a high profit, or just go down.
So, all that said, I return to my original statement that this is an interesting learning opportunity, and the limit of $5000 makes this a modest investment that will likely see modest profits if it does profit.
Think it through, determine your risk based on your total account size, and decide how long you want to hold this stock, so that when the price is announced tonight, you will be able to confirm an appropriate IOI for you.
We don’t have any data for technical analysis to trade short term, and the data for fundamental analysis (investing) looks promising (otherwise we wouldn’t invest), but at least know your risk cutoff going in, and how long you want to hold. If you want to trade it, it’ll be a crap shoot, given the zero data situation, but hey, there may be a window of opportunity. Especially if the underwriters have done well with hyping and get some early buyer interest that shoots the price up initially.
I have no financial relationship with Doximity, Fidelity, or any of the banks involved, and this is not financial advice. This information is purely for educational purposes, and good ole’ fashioned fun. By golly!