A company’s initial public offering (IPO) is usually the first chance for investors to put their money into private businesses that are being listed on a public stock exchange for the first time.
So, find out what you need to know about IPO trading and how to invest in IPO stocks in my handy guide right here.
Also consider: Best stocks and shares to buy now
How do I invest in an IPO stock?
5 simple steps
- Open an account on a platform that offers access to IPOs and deposit funds. You may not be able to access IPOs from a standard brokerage account, so you’ll need a specialist such as IG or Freedom24 by Freedom Finance to be able to invest.
- Select and research the IPO stocks that you want to buy. IPO investments can be more complicated than standard ones, so make sure you do plenty of research. I suggest some ways to do this later in this guide.
- Decide how you want to buy your IPO stock. There are various ways to buy IPO stocks. Look just below these steps to find out about the different methods of investing in IPOs.
- Request your shares. If you’re looking to buy in the primary market, you’ll need to essentially “offer” how much you’d like to buy. You may not be allocated all of the shares you’d like, especially if you are an individual investor.
- Place your trade. You’ll be asked to confirm that you’d like to go ahead with your allocated offer. Once you accept, you may still not be able to buy your entire offer, but you won’t be asked for more than the amount you put up.
It’s important to note that there may be additional rules around whether you can invest in IPOs with certain brokers, such as having a minimum amount in your account or placing a certain number of trades in a fixed period. Check this information before you go to invest.
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When can you buy IPO stocks?
As you can likely imagine, the IPO process is long, and so your ability to buy IPO stock is partially determined by how far a company has got in this process.
Broadly speaking, there are three main time frames when you can use to invest in the IPO market. These are:
- Taking a position pre-IPO
- Buying shares during the IPO
- Buying once the company is public.
Read more about these methods below.
Taking a position pre-IPO
Certain companies’ IPOs can garner a great deal of attention before they happen. In this case, a stockbroker or investment platform may offer what’s known as a “grey market”.
While you can’t buy pre-IPO stocks to own, in a grey market you can speculate on what a company’s market capitalisation, or “market cap”, will be by the end of the first trading day.
In this pre-IPO stage, you’re able to either buy (also known as “going long”) or sell (also known as “going short”). The table below explains the difference between these two strategies:
|Buy (go long)||Sell (go short)|
|You’ll buy, or “go long”, if you think the market cap will be higher than the quoted price.||You’ll sell, or “go short”, if you think the market cap will be lower than the quoted price.|
Only certain platforms offer investment accounts through which you can trade on the prospective values of companies at their IPO. Make sure you check with your provider that you’re able to do this before you deposit money.
Buying IPO stock at source
If you’re not interested in or there is no grey market to speculate on market cap, your next option is to buy at the IPO price in the “primary market”.
The primary market is essentially the first point when you can buy and own the company’s shares in a new IPO.
You’ll first need to subscribe to the IPO in order to be included. You’ll need to be sure that any investment platforms or online brokers you intend to use will allow you to do this.
Then, you request an allocation of shares. In general, institutional investors will be prioritised over individuals, but you may still be allocated some of what you request if your broker has a good relationship with the underwriter.
In doing so, you’ll then be able to buy shares in the IPO on the first trading day.
The benefit of doing this is that it offers individual investors a stock allocation and the opportunity to access and buy IPO stocks at the same time and price as big institutional investors.
That way, you don’t have to wait until the shares move onto a secondary market to make use of them – you can find out more about this in the next section.
Market excitement may cause volatility
One thing to beware of when investing in the primary market is that excitement and expectation can be a double-edged sword.
Prices may be volatile and the value of shares may swing significantly. If you buy at a particularly volatile point in this period, you may end up losing value on your investment.
Be careful when participating in an IPO that you aren’t accidentally being pulled into an investment fad.
Buying once a company is public
Alternatively, you can simply wait until shares begin trading publicly between other investors on what’s called the “secondary market”.
Once the initial issue of shares is complete, individuals and institutions such as hedge funds will start trading them on this secondary market.
This is where you likely have done most of your investing before, buying and selling through your broker in a range of different companies.
While this will likely mean missing out on the initial price of the investment, waiting until this point offers two key advantages:
- It gives the stock a chance to find some “price discovery”. This means that the initial volatility has worked its way out from the first day of trading and the investment is finding a less volatile level to sit at.
- You can make decisions based on the “lock-up period”. The lock-up period is a set time frame which prohibits pre-IPO shareholders, such as company founders and early investors, from selling their stakes. By waiting to see what these individuals do, you can gauge how confident they are in the performance of the company.
You can read more about the lock-up period later on in my guide.
Spread betting and CFDs
Alternatively, once the shares move onto the secondary market, you could consider spread betting or entering CFDs (that is, “contracts for difference”) to trade on the shares’ value instead.
These methods are trading rather than investing, which is more akin to gambling. In essence, you speculate on the price movements of the stocks, just as you can when taking a position pre-IPO in a grey market.
Spread betting and trading CFDs are both examples of “leveraged trading”, meaning you can still gain exposure to certain investments without actually having to own them.
Bear in mind that these are complex financial instruments and may not be suitable for you.
CFDs in particular can be detrimental to your wealth, and between 65% and 80% of retail investor accounts lose money when trading them.
Make sure you speak to a financial advisor if you’re unsure whether this is an appropriate option for you.
Is it easy to buy IPO stocks?
Clearly, there are plenty of ways to invest in an IPO. Of course, some of these are not as straightforward as simply investing in or trading stocks and shares generally.
But, buying these shares at this point may be useful for you, provided that you do so as part of a wider, diversified investment portfolio.
Can you buy stock at IPO price?
By investing in the primary market, you would be buying at “IPO price”. However, this doesn’t necessarily mean that this is the best price that you’ll ever be able to buy the shares for.
Depending on your personal circumstances and what your research indicates, you may be able to buy at IPO price or perhaps even lower later on.
What exactly is an IPO?
IPOs, standing for “initial public offerings”, are where private companies seek to raise capital by offering up a portion of their business to the wider stock market.
Generally, before a company becomes publicly available on somewhere such as the London Stock Exchange (LSE), only certain people will own a stake in it. This might include:
- Company insiders, such as founders and employees
- Professional and institutional investors
- Private equity firms, venture capitalists, or investment banks.
So, having an IPO and introducing the business onto a public stock exchange widens the pool of investors that companies have access to.
To do this, the company must first speak to an underwriter, such as an investment bank or perhaps broker-dealers, to define the terms of the IPO.
Businesses offer up a percentage of the company to the market, and this underwriter holds the portion of the business that will be offered publicly. Until they release it, the company is still technically private.
Institutional and retail investors alike can then put their money into the business in the hope that they’ll see a return – or, of course, sell short to capitalise on falls in value.
Once this money is invested, the company is then free to use it in however they stated they would in their prospectus. This might be to improve their products and services, or to settle outstanding debts.
Find out later on in my guide how to interpret this sort of information when deciding whether a certain investment is suitable for you.
Pros of IPO investments
Below are just a handful of the benefits that come with investing in a company’s IPO.
Access at the ground floor
The first and perhaps most obvious advantage of an IPO investment is that it may give you access to the ground floor of a growing company.
By buying shares when a company first begins trading on the stock market, you may be able to bag a more favourable price, potentially seeing your returns grow more if you hold it for a long period.
Meanwhile, it also means you can capitalise on the short-term performance of the company if it performs well at IPO.
Of course, as with any investment, this is not guaranteed.
Invest at the same time as professionals
By the time you trade other stocks and shares, the IPO will likely already have happened. Meanwhile, by investing early on, you can acquire shares at the same price as other institutional investors.
This may be a more cost-effective way to invest.
Ability to trade in different ways
You can trade in IPOs in different ways and at various times. So, whether you want to hold on to your shares for the long term, or capitalise on short-term swings in value, there is a variety of methods available to make the most of new companies coming to market.
Cons of IPO investments
Of course, there are also drawbacks to investing in a company’s IPO.
There may be additional risks involved
There may be other risk factors that come into play when investing in IPOs.
For example, investing in grey markets that depend on your ability to predict price movements may be difficult, and you may end up getting back less than you put down.
Additionally, buying in the primary market may expose you to greater market volatility, especially if investor enthusiasm sees the share price fluctuate more than perhaps it would in ordinary conditions.
Make sure the IPO investment you’re considering is suitable for your personal risk tolerance.
Institutional investors may be prioritised
One unfortunate point to note is that, while retail investors can buy and trade in these early stages, IPO access is typically given to institutional investors, such as hedge funds, first.
This is because it’s generally more profitable for the company and underwriter to sell 1 million shares to a hedge fund than to sell 1,000 shares to 1,000 individual investors.
Make sure the broker you choose offers you the chance to invest in the grey or primary market if you want to invest in an IPO.
You need to do your research
While IPOs can present a good opportunity, one downside is that you’ll need to do some additional research.
On top of this, you’ll need to keep up with the latest IPO news so you know which companies intend to raise money this way in the near future.
For example, in the US you can search for companies intending to go public by looking at records filed with the Securities and Exchange Commission (SEC).
This may be a more time-consuming and laborious process compared to buying other investments.
Read more below about the kind of research you may want to do before investing.
Is it good to invest in IPOs?
Whether a specific IPO is worth investing in or not will come down to both the company and your individual investment objectives and personal circumstances.
To help you establish whether it’s good to invest in an IPO, you might want to consider the following questions:
- Who is underwriting this IPO? In general, the bigger underwriters and investment banks will only bring established companies they’re confident in to market. So, if you’ve heard of the underwriter, it may be a good sign. Of course, that doesn’t mean they don’t sometimes miss, and the IPO may still flop.
- Why is this company launching an IPO? A company that’s looking for additional funding to market and expand may be worth investing in. Meanwhile, one that intends to use any money raised to pay off debt or buy the company back from private investors may be something to avoid.
- What do objective sources say about their prospects? The prospectuses that companies produce when entering the market will come from them internally, meaning they’ll likely be biased. Instead, read up on the company from independent and objective sources as much as possible and see whether other individuals and groups are tipping them for success.
- What have the underwriters and company insiders done after the lock-up period? The lock-up period, lasting between three and 24 months, is a time when underwriters and company insiders can’t sell their shares. So, by waiting until the end of this period, you might gain an insight into the confidence of those holding the stock.
These factors are by no means exhaustive, but they can be a good springboard for working out whether an IPO investment is worth it for you.
Remember: if you’re really not sure whether a company’s IPO represents a good opportunity, consider seeking independent investment advice.
Can you make money from IPOs?
The real question as to whether investing in an IPO is good or not is actually whether or not you can make money.
In theory, the answer is yes, you absolutely can. For example, Pinterest shares famously leapt up by 25% in value when they were first listed on the New York Stock Exchange in 2019.
In the long term, IPO shares can be just as valuable, too.
Apple went public in 1980 with a stock price of $22. And, as the Apple website explains, the price is just $0.10 when adjusted for the five stock splits there have been since.
According to CNBC, that means an initial $1,000 investment in Apple at its IPO would have been worth around $430,000 by 2018.
Losing money from IPOs
However, just because one IPO has proved to be lucrative doesn’t mean that they all turn out to be. In fact, investment history is littered with IPOs that didn’t turn out the way investors or even the companies themselves might have expected.
Even established companies such as Uber and Facebook flopped at their IPOs, no doubt costing many confident investors some value in shares.
A good recent example of this is the food delivery business Deliveroo. Shares fell by almost a quarter at its public launch in 2021, reportedly wiping £2 billion from the company’s market capitalisation.
So, had you entered into a position either before the launch or bought on the day of, it’s likely you’d have seen a drop in the initial value of your shares.
FAQs on how to invest in IPO Stocks
Can individual investors buy IPO stocks?
Yes, individual retail investors are free to buy IPO stocks. Simply choose the company IPO that you’re interested in and decide how you want to invest as part of the IPO.
However, bear in mind that institutional investors may be favoured over individuals, depending on the company and underwriter, and the broker you use.
How do I start trading in an IPO?
Can I buy an IPO stock before it goes public?
Can a beginner invest in IPOs?
Yes, a beginner could open an account and invest in IPOs. However, it’s important to note that IPOs can be volatile and may only be suitable for experienced traders.
Make sure you understand this before you invest as otherwise, you may be at risk of losing money.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.