Investing > How to Buy IPO Stock

How to Buy IPO Stock

Robinhood. Airbnb. Doordash. IPOs are all the hype—so how can you get in on the action?

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Updated January 08, 2022

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Do you want to miss the next Google, Amazon, or Tesla? 🔍

If your answer is no, then you should consider investing in IPOs. These stocks are very unique as they give the Average Joe (retail investor) an opportunity to become a part of the company from its humble beginnings. 

It is not uncommon for IPO stock prices to jump more than 100% on the first trading day, and you surely don’t want to miss something like that. 💰

Even though it might seem that your train has passed and that investing in the next Amazon or Apple is not possible, that is simply not true. New companies with great potential announce their IPOs regularly—like the Zomato listing in July 2021 that got the stock to a $1 billion evaluation before it even went public.  

Sure, investing in a company that is yet to prove its value is a bit of a gamble—but, we take risks at every step in our lives. 

Of course, not every decision turns out to be a good one and it’s perfectly normal to make mistakes. But, if you pick wisely, follow some basic rules and understand the subject matter well, you can increase the possibility of finding an awesome investment. 

So, in this article, we will explain everything there is to the IPOs and their importance in today’s economy. We will talk about how IPOs work, how to buy them, when, and when to avoid them. 

What you’ll learn
  • What is an IPO Stock, Exactly?
  • Who Can Buy IPO Stock?
  • Where Can I Buy IPO Stocks?
  • How to Buy an IPO
  • Advantages of Buying IPO Stocks
  • Risks of Buying IPOs
  • When to Sell IPO Stock
  • IPO Stock vs. DPO Stock
  • IPO Stock vs. SPAC
  • Conclusion

What is an IPO Stock, Exactly? 🤔

Okay, let’s start with the basics first. What exactly is an IPO stock? These three letters might confuse you at first, but we think that you’ll understand this term better if we demystify the acronym. IPO (Initial Public Offering) is a type of stock where a certain company offers its shares to the general public for the first time. 

To simplify even more, it’s a process where the company changes from private to a public type of ownership. They offer their private shares to the public investors (hence the term “going public”) by issuing a new stock on the stock exchange. 

In a nutshell, a public company is a business that is currently listed on one of the recognized stock exchanges—anyone can buy shares. In contrast, a private company isn’t listed on the exchange and its securities are owned by private investors and company members.

Why IPOs Are So Popular 🎯

IPO stocks are appealing to most investors because of their price. These stocks are offered to the general public before listing on any stock exchange, which means that the price they have will likely be the lowest it will ever be. 

From the listing, it can only go up over the long term (in most cases and if the company has potential), and therefore, acquiring some of the stocks in presale can be a huge kick start for the investor. 

You might be wondering, but what does the company itself get from offering shares to the public? The answer is simple—it gets money or rather an investment. Perfect example for this is the Indonesian company Bukalapak which raised over $1.5 billion in its IPO

When a small private company grows rapidly and comes to a stage where the initial shareholders (usually family, small investors, founders, etc.) think it can grow, even more, the company starts showing interest in going public.

IPO Stocks
Zoom (Purple) turned out to be an immensely profitable IPO, whereas Jumia (Orange) had an incredible start but slowly declined afterwards. Image by TradingView.

This means that the company can get a huge amount of investment money for its further growth and development—money that couldn’t have been acquired otherwise. You as an investor buy stocks that can grow in value in years to come, while the company gets the funds that will be used in the growth process. Everyone is happy. 🤝

Who Can Buy IPO Stock? 🙋‍♂️

The stock market might seem overly complicated to someone who doesn’t have any financial knowledge or who never invested before—but it really isn’t. Sure, you’ll have to do some homework and get familiar with the financial terminology and basics of the market, but saying that stocks aren’t for regular people is simply incorrect.

Do you think people who bought Bitcoin when it was worth pennies or invested in Amazon when Jeff Bezos was working from his garage had some spectacular financial knowledge? No—they simply believed in a project or company, same as you might.

This mindset applies to IPO stocks as well and you can be sure that it’s never too late to invest in something promising. And luckily, anyone can invest in IPOs—that’s the whole point.

The idea behind it is that the public has an opportunity to become part of the company, meaning regular people and not just banks and hedge funds. But, you can’t just walk down the street, throw some money at the stock market, and buy the IPO. It’s more complicated than that—you need a broker. 

Where Can I Buy IPO Stocks? 🏦

If up to this point you’re thinking: “Nice, IPO stocks seem interesting. I want to invest”, the next thing you might be wondering is where exactly you can buy them. As with everything stock-related, you may think that such “place” is out of your reach and that you wouldn’t be able to invest, but that’s not the case anymore.

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance.

All you really need to do to get access to IPOs is to open a brokerage account. Nowadays, this process is almost always fully digital, and you do all your trading through an easy-to-use desktop platform or phone app.

The market of online brokers is currently expanding and it can sometimes be overwhelming to choose the one which is best for you. Many online services offer IPO stocks to clients but the top online stock brokers do so at the lowest prices.

How to Buy an IPO 💰

Now that you know where to look, it’s time we talk about the process of actually buying IPO stocks. It might need some getting used to, but the process is fairly simple and we’ll cover it in the following steps. 👌

Open a Brokerage Account 👤

First thing first, you need to open a brokerage account. The process is fairly straightforward, and in most cases, it’s copy-paste for every trading platform. You just need to follow the instructions, provide relevant personal info, and voila! You have an account.

For most brokers, the entire application process is fully digital and can be completed online. However, a few companies require that you send them some documents via physical mail, so just keep this in mind as a possibility, even though it is not very common.

Many platforms are now recognizing the importance of IPOs and their popularity—therefore, they’re trying to give access to these stocks to their customers. In June 2021, Robinhood and Sofi expanded their service to IPOs, making investing in new stocks more widely-accessible than ever. This trend will likely continue in the coming years. 

However, note that not just any broker will do it for you—some platforms have a very limited selection of stocks and charge an arm and a leg in fees. Therefore, the easiest way is to go for a broker that specializes in IPOs:

Fees
Commissions

$0

0% Management fee

Account minimum

$0

$0

Minimum initial deposit

TS Select: $2,000

TS GO: $0

General
Best for

Active options and penny stock trading

  • Low fees
  • Younger investors
Highlight

Powerful tools for professionals

Promotion

Free stock with mobile app sign-up

Rating
Fees
Commissions

0% Management fee

$0

Account minimum

$0

$0

Minimum initial deposit

$0

General
Best for
  • Low fees
  • Younger investors

DIY stock trading

Highlight

Pioneer of commission-free stock trading

Promotion

Free stock with mobile app sign-up

Free stock

Rating
Fees

Commissions

$0

0% Management fee

$0

Account minimum

$0

$0

$0

Minimum initial deposit

TS Select: $2,000

TS GO: $0

$0

General

Best for

Active options and penny stock trading

  • Low fees
  • Younger investors

DIY stock trading

Highlight

Powerful tools for professionals

Pioneer of commission-free stock trading

Promotion

Free stock with mobile app sign-up

Free stock

Find an IPO You Like 💚

Next, you need to find an IPO you like. This is entirely up to you and we suggest you put some research into your decision.

The IPO you pick might be the one you think has potential, a good business idea, and a great CEO. The key thing here is that you are certain you want to buy that specific IPO and are ready to invest in it.

Become Eligible 🔞

This is a tricky step. In order to be eligible to buy IPOs, most platforms want some sort of proof that you have the funds and that you can back up your purchase. They do this to separate serious buyers from casual speculators.

Different broker platforms have different requirements, so you need to pay close attention to that before you choose your broker. Fidelity (one of the most popular brokerage platforms) for example, requires you to have more than $100.000 in your account or that you completed more than 36 trades in your account history before you can buy IPOs. 

Request IPO Shares 💲

This is where your purchase happens. Let’s assume that you met requirements the and that you have chosen the IPO in which you want to invest. You now need to request a certain number of those IPO shares. 

Think of this as a maximum number of the shares you are willing to buy—the realistic number which you will buy might be lower than that desired number (it depends on other variables at the exact moment in time), but the system won’t let you buy more than you entered so overpaying isn’t possible.

Place Your Order 🤝

This is the last step in the purchasing process. If you’ve done everything correctly up to this point, the broker will notify you if your request went through and if your order is placed. If the outcome is positive, we can only congratulate you—you just invested in an IPO stock. 

It’s worth mentioning that the system won’t let you buy the stocks for a price which is higher than the one which you choose nor will you be able to buy a higher quantity of shares. This is a handy precaution, as it will protect you from overpaying.

Now that you own your first IPO stocks, you can do whatever you want with it. You can hold them and wait for their value to increase, day trade with them, or simply continue investing every month. Investors use different techniques to determine their course of action, keeping an eye on stock charts being the most commonly used one. 

📱 FYI: Probably the easiest way to buy and sell any stock nowadays is through one of the top investing apps—most of which offer IPOs.

Advantages of Buying IPO Stocks ✅

As with everything, there are different advantages and disadvantages when it comes to investing in IPO stocks. The consensus in the financial community, however, is that the advantages outweigh the disadvantages—hence the increased demand for IPO investing. 

The main advantage of IPO stocks is that you, as an investor, are entering the game early. Think of all the people who bought stocks of Amazon or Apple when they were worth pennies. 

At the moment of its IPO, AAPL was worth $22. For comparison, as of 26th June 2021, one Apple stock is worth over $140. Of course, the price of stocks is variable and they have ups and downs throughout the time—but it’s obvious that if you invested back then, you would have made quite a bit of money.

Buying IPO Stocks
Since its inception, Apple’s growth seems incomparable to that of the S&P 500. Image by TradingView.

Sure, you had to be a visionary back then and trust the project since no one knew that Apple would become this big, but nothing has changed since then. If you believe in a certain company, investing in an IPO might be a worthwhile venture.

Being first in the line when the company goes public gives you a clear head start. The later you enter in the competition, the smaller the prize you should expect. A perfect example of this is the IPO offering of Zomato, a company whose shares jumped over 80% the day after the initial stock listing

Another advantage of buying IPOs is that the price of the initial offering will probably be the lowest for that specific stock. Of course, there are cases where the prices surge down after the stock listing, but that is rare. Low price means that you’ll have plenty of room to make profits—your investment might be worth 10X more in a couple of years. ☝

In comparison to other types of stocks, IPOs offer huge growth potential. But, not everything is sunshine and rainbows, and there are certain disadvantages you should be aware of. Maybe disadvantages aren’t the right term—potential risks would be more fitting.

Risks of Buying IPOs ⚠️

The main risk of buying IPOs is the uncertainty of the company and its growth. Sure, the company might be the next Amazon or Facebook, but in reality, that’s rarely the case.

Usually, if the company has potential, the price of the stocks can rise to a certain degree, but only one in, let’s say a million cases, gets to skyrocket and multiply your initial investment a hundred or more times. This is called a unicorn and let’s face it, chances of you getting to ride it are slim (although we aren’t saying it’s not possible). 🦄

Speaking of unicorns, it’s worth mentioning some of them that have been trending lately—and always will be. For example, Weber in the U.S. reached a staggering $8 billion evaluation before it went public. The past few years were stellar in terms of IPOs globally but it’s important to know that these unicorns only appear once in a while.  

Another risk which you should take into account is that you can’t always know for sure how many stocks you will be able to buy. The IPO process is subscription-based and this means that there isn’t a limit to how many people can apply for the stocks.

In the end, based on the number of total investors, the stocks are transferred amongst them and this may result in a lower number of stocks than you expected. 

Pros

  • Possible high return on investment
  • Investors who invest in IPO are ahead of 99% of other people
  • Low starting price

Cons

  • Risky and uncertain
  • You get an uncertain amount of shares
  • External factors that influence the value of stocks (country, politics, etc.)

When to Sell IPO Stock ⏳

Ah, the million dollar question. Let’s picture this scenario—you invested in a certain IPO and after a few months, the company closed a big deal with the European Union and now your stocks are worth 5 times more. Should you sell, hold or invest some more? Decisions, decisions…

If you happen to be in this situation, we can only salute you. You are probably one of few that made money on the stock market and flipping 5 times your initial investment in a few months’ time—is very rare. Even if that number was smaller, it’s certainly a big win for almost anyone.

But, would it be smart to sell now? Will the company continue growing and with it, the stocks price? Or maybe the price will plummet and you’ll lose your initial investment? 

The correct answer to the question in the title of this paragraph is beyond us. Every stock is different and depends on a huge number of fundamental factors.

When To Sell an IPO Stock
Note that most IPOs don’t show impressive growth after their initial hype period. Many stocks lose value after their IPO. Image by TradingView.

However, we do suggest that you plan out your exit strategy before investing. Planning is key here and you should have a winner’s mindset.

Plan like you are going to pick up profits on your investment and choose a number which will satisfy your needs. If this does happen—then you can take the win, watch your portfolio grow, and not feel like you’ve missed out even if the stock keep on growing. 

You can also sell some of your shares and leave the rest to see how it plays out over time. Remember that you never invest more than you are ready to lose and that returning your initial investment is in most cases a solid achievement.

How Soon Can You Sell IPOs 📅

It’s very important to understand some key rules when it comes to selling a stock after its IPO. The last thing you would want is to participate in the IPO and then face the uncertainty of selling because you didn’t know if were legally eligible to sell.

Simply put, in most cases, after the company goes public and gets listed on the exchange, you can sell your shares. We say in most cases, because this is strongly related to the famous S-8 registration that the company needs to file with the SEC, long before the IPO.

Some companies fail to do so. In such cases, there is a 90-day lockup period—you can’t sell the stock before that time is up. This is a rare occasion as the S-8 form is something SEC (Securities and Exchange Commission) pays a close attention to.

There are other rules as well, but it’s unlikely that those will come into play when it comes to selling IPO stocks. In most cases, companies fulfill them at the start of the whole IPO process as they are usually prerequisites for everything else.

IPO Stock vs. DPO Stock ⚖️

IPO stocks are only one of many types of stocks which are present on the market. DPO (Direct Public Offering) is another type which is very popular amongst investors and they are very similar to IPOs in some aspects.

However, there are certain differences—albeit small, these differences can make it or break it, and it’s very important that you understand them before you start investing. Last thing you would want is to end up investing in stocks which you don’t want to.

At the table below, you can see some of the main differences between these two types of stocks. 

IPO (Initial Public Offering) StocksDPO (Direct Public Offering) Stocks
Shares are available to the investors before the market opensShares are only available at the moment of listing on the exchange—no presale
Not every investor has access to the listed sharesEvery possible investor has access to the shares
More appealing to larger companiesMore appealing to smaller companies
Process of investing takes more timeProcess of investing is very fast

IPO Stock vs. SPAC 🛡️

As mentioned before, it can often be hard to buy IPO stocks. Traditional investing in IPO stocks is still very popular, but many investors found a workaround when it comes to the investment process. This workaround is also considered to be an alternative to the traditional way and is called SPAC (Special Purpose Acquisition Company).

SPACs have become increasingly popular in the last couple of years, 2021 being the record year in terms of money raised. The way they work might be a bit complex, but we’ll try to simplify it as much as possible.

SPAC is essentially a dummy company with one sole purpose—to raise capital through an IPO. The money raised is used for one reason only, to acquire an existing company.

When the SPAC gets its IPO funds, it has a two-year time frame in which the owners (owners of the SPAC are usually investors or sponsors which have niche expertise in a particular industry) have to acquire the target company, or the SPAC will get liquidated.

SPACs are a great alternative to the traditional IPO process, and many big companies use them to the fullest. Even though they are now extremely popular, SPACs have been around for quite some time now, with the first ones dating back in the 80s. 

Conclusion 🏁

This was a long article and if you’ve made it this far, we can only say congratulations! But, you should congratulate yourself, as well. Investing time into reading something which isn’t general knowledge indicates that you are aware of the importance of IPOs and want to learn more about them, which we think is great. IPOs can in fact offer great value to your potential investments.

In this guide, we only scratched the surface of the IPO stock world. But if we brought you one step closer to the decision of investing into them, we count that as success. Even if you don’t end up investing in IPOs, you are richer with some knowledge. If nothing, you will be able to answer a quiz question about IPOs, if it ever comes to that. 😁

Buying IPO Stocks: FAQs

  • What Does IPO Stand For?

    IPO is an acronym for (Initial Public Offering). IPOs are stocks that are traded publicly for the first time on a major stock exchange.

  • Where Can I Find IPO Stocks?

    For many trending IPO stocks, Google would be your best bet. If you have an account on a broker platform, you can check which IPOs are offered there. If not, many top stock trading apps offer IPOs, and it would maybe be a good idea to start your search there.

  • What is Pre-IPO Stock?

    Pre-IPO stock (or placement as it’s often called) is a process where a large chunk of shares is sold to big hedge funds or private investors before the IPO. Small investors can’t participate in this and only participants who want to take large stakes in the firm are eligible.

  • How Do I Buy Stock Before the IPO?

    The process of buying stocks before the initial IPO is called pre-IPO and it’s very exclusive. This opportunity was available only to a handful of participants in the past (usually equity firms, hedge funds, big companies, etc.) but since 2012 and the introduction of the JOBS act, now small investors can participate as well. The best way to invest in pre-IPO is to be in touch with other investors, talk to your broker, or be up-to-date with the news.

  • Can I Sell Pre-IPO Stock?

    There are several ways in which you can sell pre-IPO stock. You can wait for the IPO and sell the stocks then on the exchange or you can find someone who is willing to buy the stocks from you for cash. 

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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