If you happen to walk past the New York Stock Exchange (NYSE), you’ll often see a banner out front celebrating the listing of a new company on the stock exchange. In many cases, that means the company is having its initial public offering (IPO), where shares of the company can be traded by the general public.
But how do you buy these IPO stocks?
You can’t walk into the NYSE or other stock exchanges and order an IPO stock like you’re ordering a sandwich at a deli. However, there are a few straightforward potential ways to invest in IPOs and/or the resulting publicly-traded stock, whether you’re an institutional investor, an accredited investor, or an individual retail investor.
What’s the difference between pre-IPO stock and IPO stock?
Before figuring out how to buy IPO stocks, it’s important to understand the difference between a pre-IPO company and one that’s going public.
As the names suggest, pre-IPO stock is equity in a company that has not yet gone through the IPO process. There might be speculation about a hot startup going public in the near future, but before they actually file a registration statement with the Securities and Exchange Commission (if going public in the U.S.), they’re still in the pre-IPO period.
During this pre-IPO stage, the company remains privately owned. Still, you might be able to buy stock in pre-IPO companies, such as through a secondary marketplace like Forge. To invest in the private market directly, you typically need to be an accredited investor, meaning you meet certain financial or professional requirements.
However, pre-IPO stock generally lacks the liquidity and transparency of IPO stock. That can create risks, like not being able to find a buyer for private company equity quickly. With a publicly traded company (i.e., one that has completed an IPO), the stock is listed on a stock exchange for general public trading, which usually means that the stock is more accessible, more investors can participate, and there’s more clarity on the share price.
While investing in IPO stock is often easier than investing in pre-IPO stock, the general availability of IPO stock increases competition.
If you can buy pre-IPO stock when a startup is still growing rapidly, for example, then by the time the IPO happens, you might be able to sell your shares for a substantial gain (though there are no guarantees and you could also lose all or some of your investment). IPO stocks have the potential to appreciate in value too.
Note that a startup isn’t guaranteed to become a public company via an IPO. It might experience other liquidity events, like getting acquired, or it might remain private for as long as it stays in business.
How to buy IPO stock
If you want to invest in IPO stocks, you can buy shares in a few different ways.
Institutional investors, like pension funds or hedge funds, may have an opportunity to buy IPO shares before the stock actually starts trading on an exchange. That’s because a company going through an IPO will generally enlist the help of underwriters, like investment banks, to gauge interest in the stock and get purchase commitments.
In select cases, individual investors may also have the opportunity to invest directly in IPOs, such as if an investment bank partners with a retail brokerage to sell shares. If you do invest early in an IPO, you might face restrictions or company policies that limit your ability to sell IPO shares for a short period, e.g., 30 days (or perhaps longer, such as if you’re a company insider), following an IPO.
If you’re not investing directly in an IPO before the shares begin trading publicly, you can start buying IPO stock once shares begin trading on the open market, like any other publicly traded stock.
Even if you missed out on buying IPO stock on the first day of trading, you can invest in a stock that recently had an IPO by purchasing shares just as you normally would for other companies, e.g., through a brokerage app. Keep in mind that stock in a recently public company (or any company) can be volatile, as it can take time for the stock price to become more stable, if at all.
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