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Quick Answer
Investing in an IPO is an act of buying shares of a company upon its initial public issue to the stock market. This is typically done in the US by means of IPO allocation (if available) or by means of purchasing the shares on the initial trading day through a limit order. Not every investor gets an allocation, and IPOs are more volatile and risky than established stocks.
Key Points:
- IPO investing occurs before the commencement of trading or on day one.
- Allocations are not guaranteed and are limited.
- The majority of beginners buy IPOs upon listing, rather than before.
- The first few trading days have the highest volatility.
- Risk management is essential rather than going with hype.
Investing in the IPO can provide you with access to shares in a company when it goes public, but the process works differently compared to purchasing regular stocks.
Have you ever wondered why confident investors are always able to get IPO shares before anyone else? You may also find that most people get the shares when the stock begins trading publicly.
The answer to this question lies in how Initial Public Offerings are structured. It is essential to understand how this process works to try to invest in IPOs.
When a company decides to go public, it does not just list the shares on a stock exchange and allow anyone to purchase them.
It has an organized allocation process, strict eligibility criteria, and high levels of risk that beginners often overlook. Therefore, it is essential to learn how to invest in IPOs.
This guide provides a walk-through of the two key routes US investors can take: either obtaining an IPO allocation before the stock launches on a stock exchange or purchasing shares when it first opens.
It does not matter whether you are keeping tabs on what offerings are coming or if you are considering your first IPO opportunity. What you want to do is know what you are buying, how it works, and what risks you are exposing yourself to.
What is an IPO and How Does IPO Investing Work?
An IPO (Initial Public Offering) is when a private company raises capital by offering shares to the public in a new issue of stock.
If a private company decides to go public, it will hire investment banks (underwriters) to assist in selling its shares.
This process aims at fundraising money for the expansion, paying off debt, or enabling early private investors to cash out.
IPO vs Direct Listing
An IPO involves underwriters selling new shares, whereas a direct listing involves current employees and investors selling shares to the public.
A traditional IPO involves the creation and pricing of new shares. In a direct listing, no new stock is issued, and the market sets the price right away, without the cushion of underwriters stabilizing the stock.
Primary vs Secondary Shares
Primary shares refer to new shares created by the company, while secondary shares refer to the shares that the existing stockholders issue.
Being able to discern whether the funds are directed towards the business (primary) to spur growth or are directed towards those early investors cashing out (secondary) is critical when you read an IPO prospectus.
IPO Timeline
The IPO process involves a series of activities that include the initial announcement and filing paperwork with the regulatory agencies, then the pricing, and lastly the launch of the stock in the market.
- Filing: The company submits an S-1 form with the SEC.
- Roadshow: Company executives pitch the firm to institutional investors.
- Pricing: The first price per share is determined by the underwriters.
- Listing: The stock is made available for trading in an exchange (such as the NYSE or the Nasdaq).
How Do You Invest in IPOs in the US?
To invest in US IPOs, you require a specialized brokerage account and fulfill specific eligibility requirements.
Although the general public can buy the stock when it begins trading on the exchange, it is hard to buy it at the price at which it was offered (before it reached the market).
What You Need
To be included in the actual allocation, you generally need a brokerage account that provides access to IPOs. Certain brokers require a minimum account balance or trading history.
It is crucial to research educational materials, including those available on STARTRADER, to understand the fundamentals of account management before attempting to access high-risk assets.
Where IPO Shares Come From
The underwriters issue only a certain number of shares to brokerages. Due to high demand and a supply that tends to be lower than demand in most cases, there are no instances in which all retail investors requesting shares actually receive shares.
Why Many Investors Don’t Get Full Allocations
Brokers usually allocate shares using a scoring system or a lottery. When a deal is oversubscribed (that is, there are more buyers than shares), you may request 100 shares, but only get 10, or none at all.
- Note: The possibility that you can get an allocation does not mean that you should. In some cases, easy access to an IPO may mean institutional investors are shunning it.
How Can You Invest in Upcoming IPOs?
To invest in upcoming IPOs, you can track the deal calendar and actively analyze the company filings before the IPO launch date.
You cannot just wait for the news on the day of the launch. Preparation begins several weeks before it.
Tracking the Pipeline
Investors use IPO calendars, which are lists of companies offered by stock exchanges or financial news organizations which have registered to go public. These calendars indicate the expected date, the price range, and the number of shares to be offered. In case of official data, you can refer to the Nasdaq IPO Calendar to find out what is on its way.
What to Check Before Joining
Research the S-1 filing of the company with the SEC before investing capital. Find the section with Risk Factors. Is the company bringing in revenue? Is it profitable? Otherwise, is there a straightforward way to profitability?
How Do You Find IPOs to Invest In?
You can find IPOs to invest in by filtering for companies whose prospectuses are on record and have a price range set.
Not all firms that declare their intention to go public actually reach the finish line.
What “Filed,” “Priced,” and “Listed” Mean
- Filed: The company has completed and submitted the paperwork, but has not yet set a final date.
- Priced: This price per share and the value are finalized by the underwriters (usually the night before trading).
- Listed: The company is actively listed on the stock exchange.
Filters for Quality
When deciding how to identify IPOs to invest in, consider companies with:
- Increasing Revenue: Consistent annual revenue growth.
- Sensible Valuation: The price that is reasonable relative to similar public companies.
- Sector Strength: A company operating in an expanding market.
Step-by-Step: Placing an IPO Trade
You can place an IPO trade either by asking your broker to allocate, or by buying it on the open market as soon as the trade starts.
Suppose you are wondering how you can invest in IPOs through trading account interfaces. Know that it will work differently depending on whether you want to get the offering price or buy on day one.
Step 1: Read Key Deal Terms
Get familiar with the ticker symbol, the price range to trade (for example, $18-$21), and the date.
Step 2: Decide Your Maximum Price and Size
Decide the extent to which you can lose. The IPOs may fall 20% or even more within a day. Do not use money that you require to meet basic needs.
Step 3: If Allocated: Confirm/Submit the Request
If you are also in a position to obtain an allotment, you must submit a conditional offer to purchase. If the end price falls within the agreed price range, the order can be executed. When listing, you generally have a very narrow time to verify this order the night before.
Step 4: If Buying Day One: Use Limit Orders
The majority of investors will purchase on the secondary market (after the stock listing). Market orders should never be used on the IPO day. Its price may fluctuate in a few seconds. A limit order ensures you only pay a specific price or higher.
Step 5: Manage Volatility
The best tool when learning how to invest in IPOs online is patience. It is common for a stock to jump up during the first hour of the day and then level off later in the day or the week. One pitfall is following a vertical green line, which leads one to purchase at the peak.
Can You Invest Before an IPO (pre-IPO)?
The pre-IPO investment is usually limited to accredited investors, employees, or institutional funds.
When individuals ask how to invest in pre-IPOs, they often refer to building connections in private equity markets.
What Pre-IPO Investing Usually Means
This is when the company buys the shares of early employees or private investors before the initial listing on a stock exchange. This occurs in the secondary marketplaces, which deal with private securities.
Who It’s Typically For
These markets are usually restricted to so-called accredited investors. These are persons with a high net worth (typically above $1 million, excluding their primary residence) or annual income.
Key Risks
Pre-IPO shares are illiquid. They are not easy to sell until the company goes public, which could happen years later or not at all. In addition, there are the obscure and inflated valuations in the private market.
Which Are the Most Significant IPO Investing Risks?
Extreme volatility, the expiry of lockups, and a lack of financial history are the most significant threats in IPO investing.
- Day-one volatility: It is not unusual that a new stock moves 30% or more on the first day.
- Lockup expirations: It can lock out early insiders during 90-180 days. In the event of the expiry of this “lock”, a flood of selling can cause the price to plummet. When this “lockup” expires, the market often sees a price drop between 1.15% and 3.29% due to increased supply.
- Limited history: Compared to blue-chip stocks, IPOs lack a track record of quarterly earnings to examine.
- Liquidity risk: During the initial couple of hours, the spread (buy and sell prices) may be quite broad, making it expensive to enter or exit trades.
To go into greater detail on securing your capital, trustworthy government bodies such as FINRA issue warnings about the specific risks posed by new problems.
How Much Should You Invest in an IPO?
You are advised to invest in an IPO as a very small percentage of your portfolio, and you can afford to take on high risk.
Position Sizing Rule of Thumb
According to a significant number of professional traders, you should not risk more than 1% or 2% of your capital on speculative trades. Since IPOs are untested, they will be classified as speculative.
Diversification Matters
Never go full on one of the hype stocks. When utilizing a platform such as STARTRADER to enter different markets, be sure to have other types of both established and speculative IPO plays in your portfolio.
IPOs vs SPACs: What’s the Difference For Investors?
A SPAC is not like a regular IPO, since it is a shell company that goes public and then acquires a company to merge with later.
How the SPAC Process Differs
A Special Purpose Acquisition Company (SPAC) is a form of fundraising that buyers use to raise capital for investors with no commercial activities. It then goes to seek out a private company with which it merges, effectively making it a publicly owned company.
Risk Factors to Watch
The SPACs may be riskier than the conventional IPOs. Sponsors who are supposed to get a good deal are the sole hope of the investors. If the sponsors cannot identify a target, the SPAC is liquidated, and the money is refunded, yet the opportunity cost of that period is lost.
Comparison: IPO vs Direct Listing vs SPAC
| Route | How Shares Are Sold | Typical Risk | What Investors Should Watch |
| Traditional IPO | Underwriters sell new shares to the public. | Pricing can be volatile; allocations are hard to get. | Lockup periods and valuation. |
| Direct Listing | Existing shareholders sell directly on the exchange. | No price stabilization; potentially higher volatility. | Lack of new capital raised for the company. |
| SPAC | Shell company lists first, then merges. | The quality of the merger target is unknown at launch. | Sponsor incentives and dilution. |
Checklist: “Do Not Do This” on IPO Day
- Do not go after vertical price swings (FOMO buying).
- Do not take orders as market orders (Limit Orders always).
- Do not overlook the lockup expiry date.
- Do not bet more than you can lose.
- Do not use social media hype to do research.
FAQs
Investing in US IPOs requires an investment brokerage account that offers IPO allocations. Alternatively, you may wait until the stock starts trading in the exchange (secondary market) and purchase shares using any standard trading account.
You can also make investments in future deals by tracking IPO calendars to track what companies are filing S-1 forms. After finding a target, check whether your broker is included in the allocation or will be buying on the listing day.
IPOs can be found on stock exchange websites (such as Nasdaq or NYSE) or in financial news sources that offer IPO Pipelines (or IPO calendars). Seek the companies that have fluctuated out of Filed to Priced.
Most contemporary brokerages allow you to invest online. You can request shares in the New Issues or IP section of the dashboard of your broker to request shares, and in the standard trade ticket, you can purchase the shares after the ticker is live.
Conclusion
IPOs offer the thrill of investing in a business at the early stages of its public journey. But for most beginners, the entry barrier to early allocations is very high, and the risks on the first day of trading are very high.
Effective IPO investing is not about winning the lottery with a hot tip. It involves knowing how to create a gap between what is offered and what is in the market, using limit orders to guard your entry, and taking proper responsibility for sizing your positions.
You might be trading through a platform such as STARTRADER with established CFDs, or you might be investigating new stock issues, but in either case, you must ensure you conduct research rather than rely on hype.
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