This task can be challenging because of the lack of readily available public information on a company that is issuing stock for the first time. When you participate in an IPO, you agree to purchase shares of the stock at the offering price before it begins trading on the secondary market.
This offering price is determined by the lead underwriter and the issuer based on a number of factors, including the indications of interest received from potential investors in the offering. Before you can invest in an IPO, you first need to determine if your brokerage firm offers access to new issue equity offerings and, if so, what the eligibility requirements are. Typically, higher-net-worth investors or experienced traders who understand the risks of participating in an IPO are eligible.
Individual investors may have difficulty obtaining shares in an IPO because demand often exceeds the amount of shares available. Due to the scarcity value of IPOs, many brokerage firms limit who can participate in the offerings by requiring customers to hold a significant amount of assets at the firm, to meet certain trading frequency thresholds, or to have maintained a long-term relationship with their firm.
Assuming you have done your research and have been allocated shares in an IPO, it is important to understand that while you are free to sell shares obtained through an IPO whenever you deem appropriate, many firms will restrict your eligibility to participate in future offerings if you sell within the first several days of trading. The practice of quickly selling IPO shares is known as "flipping," and it is something most brokerage firms discourage. It's also important to remember that there is no guarantee that a stock will continue to trade at or above its initial offering price once it starts trading on a public stock exchange.
That said, the reason most people invest in IPOs is for the opportunity to invest in the company relatively early in its life cycle and profit from potential future growth. A review of historical data dating back to shows that annual returns on IPOs have varied widely from one year to the next. Investing in a newly public company can be financially rewarding; however, there are many risks, and profits are not guaranteed. If you're new to IPOs, be sure to review all of our educational materials on this topic before investing.
There are risks associated with investing in a public offering, including unproven management, and established companies that may have substantial debt. As such, they may not be appropriate for every investor.
Customers should read the offering prospectus carefully, and make their own determination of whether an investment in the offering is consistent with their investment objectives, financial situation, and risk tolerance.
Skip to Main Content. Search fidelity. Investment Products. Why Fidelity. Home » Research » Learning Center ». Print Email Email. Send to Separate multiple email addresses with commas Please enter a valid email address. Your email address Please enter a valid email address. Message Optional. Next steps to consider Research IPOs. How to participate in an IPO. More IPO details. Remember that although most companies try to fully disclose all information in their prospectus, it is still written by them and not by an unbiased third party.
Search online for information on the company and its competitors, financing , past press releases, as well as overall industry health. Even though good intel may be scarce, learning as much as you can about the company is a crucial step in making a wise investment. On the other hand, your research might lead to the discovery that a company's prospects are being overblown and that not acting on the investment opportunity is the best option.
Try to select a company that has a strong underwriter. We're not saying that the big investment banks never bring duds public, but, in general, quality brokerages are more likely to be associated with quality. For example, based on its reputation, Goldman Sachs GS can afford to be a lot pickier about the companies it underwrites than a much smaller, relatively unknown underwriter can. One positive of boutique brokers is that, because of their smaller client base, they make it easier for the individual investor to purchase pre-IPO shares—although this, as mentioned below, may be a red flag, too.
Be aware that most large brokerage firms will not allow your first investment to be an IPO. Usually, the only individual investors who get in on IPOs are long-standing, established, and often high-net-worth customers. We've mentioned not to put all your faith in a prospectus , but you should never skip perusing it. For example, if the money is being deployed to repay loans or buy the equity from founders or private investors, it may be worth giving the IPO a miss.
Generally speaking, money that is going toward research, marketing, or expanding into new markets paints a much better picture. In addition, one of the biggest things to be on the lookout for while reading a prospectus is an overly optimistic future earnings outlook. Skepticism is a positive attribute to cultivate in the IPO market. As we mentioned earlier, there is always a lot of uncertainty surrounding IPOs, mainly because of a lack of available information.
Consequently, you should always approach them with caution. When this happens, it tends to indicate that most institutions and money managers have graciously passed on the underwriter's attempts to sell the stock to them. In this situation, individual investors are likely getting the bottom feed, the leftovers that the "big money" didn't want. If your broker is strongly pitching a certain offering, there is probably a reason behind the high number of these available shares.
Brokers have a habit of saving their IPO allocations for favored clients, so, unless you are a high roller, chances are you won't be able to get in. Even if you have a long-term focus, finding a good IPO is difficult, as they exhibit many unique risks that make them different from the average stock.
The lock-up period is a legally binding contract, lasting three to 24 months, between the underwriters and company insiders that prohibits investors from selling any shares of stock for a specified period. However, Cramer, being a savvy Wall Street vet, knew the stock was way overpriced and would soon come down along with his personal net worth.
This overvaluation was noted during the lock-up period, though, meaning that even if Cramer had wanted to sell, he was legally forbidden to do so. Only when lock-ups expire, are the previously restricted parties permitted to sell their stock. In theory, waiting until insiders are free to sell their shares is not a bad strategy because if they continue to hold stock once the lock-up period has expired it may be an indication that the company has a bright and sustainable future.
During the lock-up period, there is no way to tell whether insiders would, in fact, be happy to take the spot price of the stock. Let the market take its course before you take the plunge. A good company is still going to be a good company and a worthy investment, even after the lock-up period expires. Successful companies regularly go public, yet sifting through the riffraff and finding those with the most potential is no easy task.
Some investors who bought stock at the IPO price have been rewarded handsomely by the companies in question. Just keep in mind that when it comes to dealing with the IPO market, skeptical investors with their fingers on the pulse are likely to see their holdings perform much better than those who are trusting and ill-informed.
Securities and Exchange Commission. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Table of Contents. Participating in an IPO. Dig for Objective Research. Always Read the Prospectus. Be Cautious. Wait for the Lock-Up Period. The Bottom Line. Company Profiles IPOs.
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