How to Apply for an IPO: The Retail Investor Process
Learn the practical steps for retail investors to participate in Initial Public Offerings (IPOs) and access new investment opportunities.
Learn the practical steps for retail investors to participate in Initial Public Offerings (IPOs) and access new investment opportunities.
An Initial Public Offering (IPO) represents a pivotal moment for a company, marking its first sale of stock to the public. This process allows a privately held company to transition into a publicly traded entity, offering its shares on a stock exchange. Companies undertake IPOs primarily to raise capital for expansion, debt repayment, or other corporate purposes. For individual investors, an IPO provides an opportunity to acquire shares in a company at its initial offering price before it begins trading on the broader market.
Retail investors typically gain access to IPOs through brokerage firms acting as intermediaries. Not all brokerage firms offer IPO participation, as access depends on their relationships with the investment banks underwriting the offering. Underwriters manage the IPO process and allocate shares to various investors. Brokerage firms in the underwriting syndicate or selling group receive shares to distribute to clients.
To participate, an individual generally needs a standard brokerage account. Some brokerage firms may have specific requirements, such as maintaining a certain account balance, demonstrating trading activity, or having household assets ranging from $100,000 to $500,000.
Institutional investors, such as mutual funds, hedge funds, and pension funds, typically receive priority and larger allocations of IPO shares. Historically, the allocation split between institutional and retail investors has been approximately 90% to institutional and 10% to retail. This prioritization means that retail investors should have realistic expectations about the number of shares they might receive, especially for highly anticipated IPOs where demand often significantly outweighs the available supply.
Once an investor has an account with a brokerage firm offering IPO access, the next step is identifying upcoming offerings. Brokerage platforms provide calendars or notifications for IPOs they participate in, allowing clients to view company details, estimated price range, and expected offering date.
Before committing to an IPO, investors should review the preliminary prospectus, often called a “Red Herring Prospectus.” This document, filed with the Securities and Exchange Commission (SEC), provides detailed information about the company, its financials, business operations, management, and associated risks.
After reviewing the prospectus, an investor can place an “Indication of Interest” (IOI) through their brokerage account. An IOI is a non-binding expression of interest to purchase shares in the IPO at a specified price or within the indicated range.
It is important to ensure sufficient funds are available in the brokerage account to cover the potential share allocation. While an IOI is non-binding, some brokerages may require funds to be held in reserve once an interest is indicated. If the investor receives an allocation, the funds will be debited from their account. Conversely, if no shares are allocated, the reserved funds are released back to the investor’s available balance.
Following an Indication of Interest, share allocation is not guaranteed. Allocations for retail investors are often limited due to high demand. Brokerage firms use various methods to distribute shares, including a lottery system or prioritizing clients based on account size, trading activity, and relationship tenure.
The final IPO price is determined by underwriters in consultation with the issuing company, typically within the pre-announced price range. This determination considers market demand during the book-building process, where institutional investors submit bids. Once the final price is set and allocations are made, investors are notified of shares received, quantity, and final per-share price.
Allocated shares appear in the investor’s brokerage account on the morning of the first trading day. The stock then begins trading on a major exchange, and its price can fluctuate significantly based on market supply and demand.
A “lock-up period” applies to many IPOs. This contractual agreement restricts company insiders, such as executives, employees, and early investors, from selling shares for a specified duration (commonly 90 to 180 days) after the IPO. Its purpose is to prevent a sudden influx of shares that could depress the stock price. The expiration of a lock-up period can sometimes lead to increased selling pressure and potential volatility.