How to Buy IPO Stock?

Knowing that a company goes public is the first step, which leads to the question of how to buy IPO stock. There are various things to consider by the individual investors before an order get’s placed with the investment bank account. Participating in an IPO requires a brokerage account, and you have to request IPO shares for any company where you want to buy IPO stock for when they go public.

What is Initial Public Offering?

Initial Public Offering (IPO) refers to the process through which a firm becomes publicly-traded. Prior to an IPO, the shares of a corporation are owned by a handful of shareholders. These are the entities or individuals who invested their time or money in building the company up until the IPO. These are typically the founders, early employees, and venture capital firms. IPO is a way for them to monetize their equity into the firm by liquidating it.

Before IPO, the equity holders cannot transact their equity. There are restrictions on them, plus the buyers are not there. Equity is only sold when there is a need to raise money to run the company.

Post-IPO, the firm gets itself on stock exchanges such as the New York Stock Exchange (NYSE) and gets a ticker. Once it gets listed on an exchange, both the retail and institutional investors are allowed to buy shares. IPO essentially brings liquidity to the equity market. This allows an investor a quick entry into and exit from a firm.

A business going public means that the brand has achieved ample popularity to flash its name on the stock exchanges. This implies that a company has become big enough so that small investors can be allowed to take risks by investing in those companies.

The transition from a private company to a public company may be an important period for private investors. It makes them fully understand the benefits of their investment. It usually involves equity premiums for current private investors. It also allows government investors to take part in the deal in the meantime.

A startup is called a unicorn when its’ valuation crosses $1 billion. IPO generally takes place when a company has achieved unicorn status.

An IPO is a big step for a company because it gives the company access to a lot of money.

What does the IPO process look like?

A business hires an investment bank to manage the IPO until it becomes public. In the underwriting arrangement, the investment bank and the company hammer out the IPO’s financial details. Later, they file the registration documents with the Securities and Exchange Commission (SEC). The SEC scrutinizes the details revealed and gives the nod if the documents are found satisfactory.

Once the company gets a nod from SEC, then its’ is launched. A lot of IPO firms get invited for the opening bell ceremony at the exchange they issue shares.

How to buy stocks in a company going public?

A retail investor gets notified by their broker that a particular firm is launching its IPO on a given date. You can then choose to apply through your broker so that a particular number of shares is assigned to you when a firm goes public. Not everyone who subscribers for stock allotment get stocks. This is because the number of shares is limited. When IPO gets oversubscribed, not everyone can be awarded stocks.

Oversubscribed IPO stocks tend to perform well. This is because there is enough demand in the market for the stocks of those firms. This drives their prices up.

Similarly, it is not a good idea to register for undersubscribed IPOs. They tend to lose money, as there is not enough demand. There are other factors that drive if an IPO is going to prove profitable for investors. One such important factor is IPO price. If an IPO price is high, which doesn’t justify the underlying fundamentals of a company, then the stock prices post IPO launch would go down.

Facebook IPO is one such example, where investors lost money because the IPO price was too high.

How to analyze and trade shares

Stock research websites are the best place to start researching specific IPOs. The best stock research websites allow you to set up alerts for specific news about a company. You could set up an alert with the combination of the company name and the term IPO.

As an exchange-listed company, the shares of the company could be one of the best stocks to buy now. The best stock analysis software can be used for a more extended due diligence process before making the final decision.

Then, you can use the best stock trading apps during the IPO. The chances are that you get some stocks at the original IPO price. Alternatively, you can buy and sell your preferred number of shares on the IPO data or at any time later by using the official stock ticker symbol within your trading platform.

Once invested, you can use your brokerage account or one of the best stock tracking apps to manage your positions within the portfolio.

How to buy IPO stock? 3 Steps to follow before investing in an IPO

An investor should follow a couple of important steps before subscribing to an IPO.

Research and read the company prospectus

Research about the company before investing or purchasing stock. Firms going public need to file a prospectus with SEC. A prospectus provides income statements, balance sheets, and other useful financial information. In a prospectus, management also discusses future plans for their company.

Look for offering price and underwriter reputation

Don’t rush into buying an IPO. There are a lot of companies that go public in a given year. Keep an eye on the IPO offering price. If the price is too high and doesn’t justify the business fundamentals, better stay away. The involvement of a reputed underwriter in the process is also a good signal.

Consult a broker or equity analysts for investment advice

Register with a stockbroker if you want to buy the stock at or after the IPO and wire funds to your brokerage account. Consult with your broker or other analysts. Before a firm goes public, analysts analyze the prospectus and additional relevant information. Read analyst reports and try to understand their reasoning.


How do you buy an IPO before it goes public?

It is generally founders, early-stage employees, and venture capital firms who invested money in the company, own equity in a private firm.

Traditionally, a small retail investor can’t own shares of a company before it begins trading. However, there are certain countries, such as the USA, where it is possible to own pre-IPO shares through the secondary market. There are platforms such as EquityZen, who ease this process.

EquityZen is an online marketplace for trading pre-IPO employee shares from non-public companies. The platform often links employees from private companies with investors. These investors would not otherwise be able to invest in the company before it goes public.

How do you subscribe to an IPO?

One can apply through their brokerage houses to subscribe to an IPO. As we discussed earlier, not everyone who applies gets allotted shares. There are also limitations on how much shares one can request.

The objective of an IPO is to make it successful. Firms, underwriters, and SEC wants a large number of market participants in a given stock. This is to ensure that the stock gets becomes a liquid post IPO. If only a handful of people are allotted shares, then that stock will not be liquid. Hence, firms prefer retail investors over institutional investors during the allotment process.

If a stock gets oversubscribed, then it is likely that a retail investor is allotted a lower number of shares compared to what they requested.

It is estimated that about 40-50 companies will launch an IPO over the next two years. Thus, it is an important first move to decide the IPO that you want to invest in.

Before you can invest in an IPO, you need an account with a brokerage house. You need to transfer money to your brokerage house, so that money can be transferred to the firm if shares are allotted to you.

The actual method of applying for shares in the IPO is straightforward.

Sign in to your trading account and pick the IPO you would like to invest in. You will also need to enter the price at which you would like to buy the shares.

Is it worth buying shares in an IPO?

Traditionally, IPO stocks are underpriced. This means that investors realize a positive return over the first six months. The highest gain is realized on the first day of trading. Over the last 40 years, investors have realized, on average, about 18 percent.

However, not all IPO turns out to be profitable for investors. Facebook is one such example of being an underperformer shortly after its IPO. Hence, one must be cautious before you invest their money in an IPO. Due-diligence is paramount. Having a clear head over a greedy heart does come in handy.

Final Thoughts

It is essential to get all the initial public offerings, collect product information, learn more about the underwriting bank, and conduct research on the stocks and public markets. It needs the experience to become familiar with IPO investing and buying stock at the right time. The most profitable investments are those investments in growth companies where you buy IPO stock before the first stock market settlement when the shares become available to the open market first time to the offer price. The price range is released when start-ups offer company shares, and you can see the price range within your brokerage tools. IPO investing also requires caution since not every privately held company that goes public is worth investing in. Analyzing data is essential and using investing services tools helps to become a successful investor in the long term.

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About the author: Alexander is the founder of and has 20 years of experience in the financial markets. He aims to make trading and investing easy to understand for everybody, and has been quoted on Benzinga, Business Insider and GOBankingRates.