How to buy an IPO and make money on it?

How to buy an IPO? Where can I view the calendar and IPO release dates? How to invest in IPO shares? Where to buy an IPO?

The basic concept of an IPO can be convincing – a brilliant company enters the market for the first time, giving investors the opportunity to become owners of its newly issued shares. In fact, deciding whether to buy an IPO is a little more difficult. An IPO requires investors to study the company's financial history and understand how they can develop their business in the future. In this article, we will look at how to buy IPOs and what you need to know before buying them.

See also what an IPO is.

What is the difference between private and public companies?

An initial public offering, or IPO – is the first time that a company's shares are offered for public sale. After the IPO, the company's shares are listed on the stock exchange and are available for purchase by almost everyone. Before the IPO, the company is considered private. Private companies may have shareholders, but usually this is a small circle that may include founders, first employees, or even private investors, such as venture capitalists.

Why do I need an IPO?

How to buy an IPO?

Two advantages that private companies enjoy are the ability to choose who will invest in them, and the absence of the need to report on financial results to a large circle of investors. After a company goes public, it is subject to the rules of the Securities and Exchange Commission (SEC), which requires quarterly income statements.

However, companies can reach a ceiling when it comes to how much private capital they can raise, and an IPO can give them access to large sums that can help them continue to grow. If the demand for shares increases, companies can issue more shares in a secondary placement.

IPOs are also often held with great fanfare, which can contribute to the popularization of the business. Companies whose shares are listed on the New York Stock Exchange or Nasdaq can celebrate this with a solemn bell ringing, which signals the opening of stock trading on the day of their IPO. All this can lead to photos and press coverage.

How is the IPO price formed?

IPO shares

The IPO price is the price at which the company's shares are set before they are sold on the stock exchange. As soon as markets open and stocks are actively traded, this price begins to rise or fall depending on demand. This is the opening price, and it can change quickly.

Not everyone has the opportunity to buy shares at the IPO price. When a company wants to go public, it usually hires an underwriter – an investment bank that structures the IPO and arouses interest from investors. The underwriter purchases the company's shares and sets a price for them depending on how much money the company wants to attract and what, in his opinion, the demand for shares is.

The underwriter is likely to offer IPO shares to its institutional clients and may reserve some for other people close to the company. The company wants the original shareholders to remain invested in the long term, and tries to avoid allocating funds to those who may want to sell shares immediately after the share price rises sharply on the first day.

This is why most private investors do not have access to shares at the IPO price, unless they are associated with the company or its underwriter. This is especially true for large IPOs.

Alternative IPO Paths

Companies do not have to go this way to enter an IPO. In recent years, alternatives to the traditional IPO have become increasingly popular. When Spotify went public in 2018, it skipped the underwriting process, instead going through a "direct listing" on the stock exchange. The company was able to to do this in part because it didn't need to raise a lot of capital, and people already understood what Spotify was doing. In other words, they didn't need an investment bank to explain to investors how the company works in order to attract them to buy shares.

How to invest in an IPO?

  1. Study the information about the company. IPOs can be difficult to analyze, since there is quite little information in the public domain. When companies are private, they do not need to disclose any income to the SEC. Before the IPO, you can view two documents to get information about the company: Form S-1 and the prospectus of the issue.
  2. Find a broker. If you want to purchase IPO shares, you should open a brokerage account. We recommend using the international broker Freedom Finance. It is a reliable and regulated IPO broker, the only brokerage company in the EU listed on Nasdaq. Freedom Finance selects only the best IPOs and offers them at low commissions, and in the first 30 days after opening an account, you can trade completely without commissions.
  3. Buy IPO shares. After creating a brokerage account, you can buy an IPO through the trading platform or by phone.

How to buy an IPO?

IPO yield

Let's look at the main steps when buying an IPO using the example of the Freedom Finance broker:

  1. Collecting applications. Freedom Finance analysts select the most promising IPOs and inform their clients about upcoming IPOs, providing the necessary analytical and reference materials. In the IPO calendar, you can see the IPO release dates, information about the company, as well as information about past IPOs.
  2. Purchase of IPO shares. In your personal account, you can make an application for the purchase of IPO shares for the desired amount. To do this, you must have an investment account with dea positive deposit of at least $ 2000. After all the applications are collected, Freedom Finance will form a collective application and send it to the underwriter.
  3. The beginning of trading. After the start of trading on the stock exchange, the company's shares usually begin to grow, as they are actively bought by traders who did not participate in the IPO.
  4. The blocking period. With the start of trading on the stock exchange, there comes a Lock up - a period of blocking for the sale of shares. Each broker has its own Lock up, which usually lasts from 90 to 180 days. Freedom Finance has a Lock up period of 93 days. If you wish, you can fix the price during the Lock up period using a forward contract, but this will cost you about 10-15% of the current value of the stock.
  5. Closing the transaction. At the end of the Lock up period, you can sell shares or keep them in your investment portfolio, as they can significantly increase in price over time.

See also the 7 best IPOs in 2021.

Conclusions

Investing in an IPO is a very profitable tool, but it should be approached with caution. IPO stock prices can skyrocket, but they can also fall sharply. Therefore, it is necessary to carefully select companies, study all the information available about them, as well as diversify their risks. A lot also depends on the choice of a broker. Freedom Finance has recommended more than 200 IPOs since 2012, and the average yield was about 70% after the end of the Lock up period. Track the IPO calendar, choose the best companies, buy an IPO from a reliable broker and fix the profit after the Lock up-these are the main steps for successful investment in an IPO.

Read also the article "How to trade stocks during the coronavirus?".