Shareholders of Tilray (NASDAQ:TLRY) have had quite a year. After going public last July at $17 a share, Tilray stock reached an intra-day high of almost $300 in September 2018. Since then it has been trending lower. Now it is approaching its initial public offering price. The IPO level is of significant importance.
When a large privately owned company wants to raise money to expand, management can sell part of the company to the public. This is how private companies become publicly traded.
These sales are where the shares that trade in the stock market come from.
IPO Basics
For example, if a $100 million company wants to go public, here is what happens. Suppose the company wants to raise $10 million. The company would have an investment banking firm issue shares to the public in its IPO. They could issue 1 million shares at $10 per share or 500,000 shares at $20. A company can choose what price to offer a certain number of shares based on what it believes is most marketable. The public now owns 10% of the company while the rest is still owned by management. This is obviously a very simplified example, but the concept is important and easy to understand.
Despite all of the volatility and the Tilray stock selloff, those who bought shares at the IPO price still have a profit. Those investors bought the shares at $17 and TLRY’s most recent closing price was at $22.49. That is still a gain of over 30%.
Tilray Stock Is Close to IPO Price
If the $17 IPO level breaks and TLRY stock goes lower then these shareholders will now be losing money. Many of them don’t want to take a loss. They tell themselves that if the stock rallies back up to the level — $17 in this case — they will sell their stock. This is so they can get out of the position and break even.
There will also be short sellers who short the stock once it trades back down to the IPO level because they believe that it will go lower. They tell themselves that if the stock rallies back up to $17 they will short more and add to their position.
Due to these dynamics there will be an abundance of sell orders when Tilray stock reaches $17. This supply of stock is what creates resistance. With all of this supply, buyers will be able to purchase the stock at the needed level without adversely affecting the price. This will prevent the shares from going higher.
At the time of this writing, Mark Putrino did not have any positions in the aforementioned securities.
