The pre-marketing process typically includes demand from large private accredited investors and institutional investors, which heavily influence the IPO’s trading on its opening day. Investors in the public don’t become involved until the final offering day. All investors can participate but individual investors specifically must have trading access in place. The most common way for an individual investor to get shares is to have an account with a brokerage platform that itself has received an allocation and wishes to share it with its clients.

  1. Underwriters and interested investors look at this value on a per-share basis.
  2. It is the first time a private company lists on a publicly traded exchange and offers its stock to be bought or sold by the public.
  3. Underwriters help management prepare for an IPO, creating key documents for investors and scheduling meetings with potential investors, called roadshows.

Therefore, from a value investing perspective, it is worth waiting for a glitch in the business (or the economy) that will cause the price to crumble, allowing investors to stack up on the stock at a discount. There are more risks with IPOs than investing in blue chip stocks or established public companies. Because IPO stocks are companies that have yet to retain long-standing track records in markets, investors are making decisions with more unknown variables, potentially confusing popular demand with intrinsic value. For this reason, you should research and analyze any company disclosures before moving forward.

Increased transparency that comes with required quarterly reporting can usually help a company receive more favorable credit borrowing terms than a private company. Newly public companies can be a great place to invest — with some caveats. IPOs involve taking a chance on a company — one that has a good history and promising prospects but is an untried player in the public markets.

Many private companies choose to be acquired by SPACs to expedite the process of going public. As newly formed companies, SPACs don’t have long financial histories to disclose to the SEC. And many SPAC investors can recoup their money in full if a SPAC does not acquire a company within 24 months.

What are the drawbacks of going public?

According to the independent news and research firm IPOScoop, of nearly 72 IPOs tracked in 2023 through  July, 44 were down from their opening-day price. Even after a successful IPO, “there are multiple SEC filing requirements that include annual, quarterly, and other detailed reports,” he adds. “Publicly held companies typically have to hire more people in their accounting and other departments, and pay more for employees with regulatory experience.”

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Buying stock in an IPO isn’t as simple as just putting in your order for a certain number of shares. You’ll have to work with a brokerage that handles IPO orders—not all of them do. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. You should invest according to your personal risk tolerance, with the knowledge that most IPOs underperform the market.

You can buy shares of an IPO through a brokerage or online brokerage. As of the end of 2023, the world’s largest IPO was completed by Saudi Aramco, a Saudi Arabian multinational petroleum and natural gas company, which went public on the Tadawul (the Saudi Stock Exchange) on Dec. 11, 2019. For example, TD Ameritrade requires individuals to have either an account value of at least $250,000 or to have carried out at least 30 trades in the last three months.

For the cachet of being a publicly traded company

To explore these and other options, see our step-by-step guide for beginners on how to invest in stocks. A company that is going public through an IPO will announce a price range and IPO date in advance. At that time, interested investors will be able to purchase shares through a brokerage account. The Renaissance IPO ETF (IPO) and the First Trust US Equity Opportunities ETF (FPX), for example, have returned 18.35% and 13.92% since inception, respectively. The S&P 500, a major benchmark for the U.S. stock market, on the other hand, has seen average returns of about 10% for the past 100 years. However, IPO ETFs may not be for you if you’re driven by hype and the short-term demand for single IPOs.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Restricted stock units (RSUs) and restricted stock awards (RSAs) grant you the right to receive a set number of your company’s stock shares once they vest, which is the predetermined date when you’ll own the shares. The underwriters lead the IPO process and are chosen by the company.

If you believe the stock is a sustainable investment and plan to hold it long-term, consider waiting a few weeks or months once the buying graze has settled and the price has reached equilibrium. However, though companies are required to disclose a detailed overview of their investment offering in their prospectus, it is still composed by them and thus not entirely unbiased. Therefore, it is similarly vital to carry out independent research on the business and its competitors, financing, previous press releases, as well as overall industry landscape. For NQSOs the spread is taxed as ordinary income in the year in which you exercise the options—even when you hold on to the shares—and companies usually withhold some of the proceeds to help pay applicable taxes. An IPO is a big step for a company as it provides the company with access to raising a lot of money.

A publicly traded company can do a better job of attracting and retaining talent, since “stock and options are considered much more valuable incentive compensation,” he adds. Conversely, a company might be a good investment but not at an inflated IPO price. “At the end of the day, you could buy the very best business in the world, but if you overpay for it by 10 times, it’s going to be really hard to get your capital back out of it,” Chancey says. In addition, the prices of newly issued stocks often fluctuate wildly on the first trading days, so it’s wise to exercise caution when it comes to the first-day pops and price surges. Truly valuable companies will remain that way over the long term.

The increased transparency and share listing credibility can also be a factor in helping it obtain better terms when seeking borrowed funds as well. IPO stocks, which are unproven, may not live up to their potential. Before investing in IPO stocks, take the time to vet the issuing companies carefully. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on, top-rated podcasts, and non-profit The Motley Fool Foundation.

Yes, you may see slightly higher highs with IPO ETFs than with index funds, but you also may be in for a wild ride, even from one year to the next. IPO returns hit a low of -9% in 2015 only to skyrocket to 44% in 2016. That’s why most financial advisors recommend you invest the bulk of top 18 best day trading stocks in 2021 your savings in low-cost index funds and allocate only a small portion, generally up to 10%, to more speculative investments, like chasing IPOs. Get Forbes Advisor’s expert insights on investing in a variety of financial instruments, from stocks and bonds to cryptocurrencies and more.

Private companies sometimes give employees reduced cash compensation in the form of shares. So to prevent those employees from cashing in all at once — and in turn affecting the return of the IPO — the lock-up period prevents those employees from selling when share prices may be artificially high. An IPO is often a complex process in which a group of “underwriters” (typically large investment banks) buy all of the shares of the new company and then re-sell them to ordinary investors. To help combat this, platforms like Robinhood and SoFi now enable retail investors to access certain IPO company shares at the initial offering price. You’ll still want to do you research before investing in a company at its IPO.

When a company is ready to go public, it hires an investment bank (or several banks) to underwrite the IPO. Generally, a company goes public after it has a proven track record of growth and other favorable results that are attractive to investors. Banks underwrite IPOs by committing money to buy the shares being offered before they’re listed on any public exchange. Often, IPOs spike in price in the early hours or days, then quickly fall. Some investment banks include waiting periods in their offering terms. This sets aside some shares for purchase after a specific period.