4 Steps for Buying an IPO Stock: Here’s a Guide
An initial populace offer, more normally called an IPO, is when privately held companies become publicly traded. When a company goes populace, its shares are available to the public for the beginning fourth dimension on an exchange .
Most investors would want to participate in an IPO on its first trading day since prices frequently go up and lead to significant short-run gains. however, it ’ randomness significant to note that not every IPO debut will outperform the market once they go public.
If you have long-awaited companies that will soon be going public and want to buy their shares deoxyadenosine monophosphate soon as they ’ ra offered on an rally, it ’ sulfur all-important to understand how to buy IPO stocks. here ’ s how you can join the IPO bandwagon, a good as some tips on which bandwagons are worthwhile .
How an Initial Public Offering Works
When a secret company announces its intentions of going populace, it ’ south typically seeking to raise more capital to expand its operations 一 it does this by making its shares available to the public for purchase. But even before making an IPO announcement, there ’ s a batch that happens behind the scenes .
first, a company has to meet the requirements of the U.S. Securities Exchange Commission by disclosing a wide array of fiscal information and file paperwork. For this reason, a company that plans to go public hires an investment banker, typically an investment bank, to assist in setting an initial price for the offer .
second, the caller must file Form S-1 course catalog with the SEC. This is a document that includes detail information about the ship’s company, including fiscal results, growth opportunities, the number of shares offered and how it plans to use the proceeds from the oblation .
last, the company can formally become a publicly-traded entity by making its shares available to the public .
4 Steps on How To Buy IPO Stocks
now that you know what an initial public offering is and how it works, here are four steps to get started with IPOs .
1. Have an Account with a Broker That Offers IPO Access
To buy an IPO broth, you must have an explanation with a broker that offers IPO trade. Most democratic brokerage house firms like TD Ameritrade, Robinhood and Fidelity offer IPO access. If you ’ re using another broker, you may need to confirm that it provides exchangeable entree .
2. Check Your Eligibility With Your Broker
Depending on your agent, you must meet specific requirements to participate in an IPO. TD Ameritrade, for exemplar, will allow you to buy an IPO breed if your bill has at least $ 250,000 or you have traded at least 30 times in the previous three months .
3. Submit an Indication of Interest
If you meet the eligibility requirements for participating in an IPO, the future tone is requesting shares. You can request a specific count of shares you ’ d like to purchase. Keep in mind that your broker may not allocate you the shares at all, and if it does, it may not be the exact number you requested .
4. Place an Order
finally, you can place an order to buy a located number of shares. Depending on your broker, you ’ ll have a casual to review and confirm your ordain before the entree closes. The thoroughly thing about participating in an IPO is that you won ’ metric ton bargain more than the request shares and won ’ thyroxine execute the order at a higher price than you indicated .
Can You Buy an IPO Stock Before It Goes Public?
Pre-IPO stocks are typically available for professional and institutional investors, including investment banks, private equity firms, company management, employees and friends. high net-worth clients besides have a find to buy pre-IPO stocks. naturally, retail investors hardly acquire shares of a secret company before it officially goes public .
Is Buying an IPO a Good Idea?
broadly speaking, IPOs are hazardous and therefore ideal for investors with high risk allowance. If participating in an IPO sounds appealing, keep in mind the risks of buying IPO stocks. typically initial public offering stocks tend to underperform since they ’ re however testing the markets and finding a way to profitableness .
In addition, it ’ second significant to know how a lot risk you ’ ra volition to take on when trade IPOs. Since IPOs are volatile, it ’ south prudent to participate with caution as prices tend to surge the first gear few days and then plummet .
Good To Know
Before putting your hard-earned money into an IPO, it ’ south vital to read the fine print of the S-1 course catalog to ensure that you ’ re familiar with the company ’ randomness plans. In this mannequin, you can learn about the company ’ s critical information, including its business model, fiscal history and plans for the IPO continue .
Alternatives to IPOs
here are three alternatives to IPOs :
- Direct listings: A direct listing occurs when a company makes its shares available to the public to purchase without involving an underwriter. Most companies that do not have the resources to hire underwriters tend to use the direct listing process.
- IPO ETFs: A second alternative is to invest in IPO ETFs. IPO ETFs are exchange-traded funds that track the performance of companies that recently became public. When you invest in IPO ETFs, you’re essentially investing in various IPOs through a single pooled fund .
- Special purpose acquisition companies: SPACs are companies built by investors to raise capital through an IPO to acquire or partner with existing companies that plan to go public. SPACs typically have no commercial operations as they do not intend to make any products to sell, but instead to raise capital to reinvest.
broadly, IPO stocks are hazardous. If you decide to participate in an IPO, ensure that you thoroughly inquiry the company mean to go populace. It ’ sulfur besides wise to limit your put size 一 invest what you can afford to lose 一 since most IPOs are likely to underperform as they find their path to achiever .
About the Author
Lydia Kibet is a mercenary writer specializing in personal finance and invest. She ‘s passionate about explaining complex topics in easy-to-understand language. Her work has appeared on GOBankingRates, Investopedia, Business Insider, The Motley Fool and Investor Junkie. She presently writes about investing, bank, insurance, real number estate of the realm, mortgages, recognition cards, loans and more. connect with her on chitter or moneycredible.com .