How to Buy IPO Stocks Before They Go Public

An Initial Public Offering (IPO) marks a significant event where a private company first offers its shares for sale to the public on a stock exchange. This process allows the company to raise substantial capital for funding growth, expanding operations, or reducing debt.

For investors, participating in an IPO presents an opportunity to acquire shares before they begin trading on the open market. This early access can be appealing, as the stock price might see a notable increase on its first day of trading, potentially offering immediate gains. Investing in an IPO provides a chance to invest in potentially high-growth companies at an earlier stage of their public life. Gaining access to these offerings as an individual investor requires navigating specific channels and meeting certain criteria.

Pathways to IPO Investment

Individual investors typically access IPO shares through financial intermediaries rather than directly from the issuing company. Traditional brokerage firms, particularly those associated with large investment banks that underwrite IPOs, often receive a significant portion of shares for allocation. These shares are primarily distributed to their institutional clients and high-net-worth individual clients who maintain substantial assets and generate considerable revenue for the firm. Establishing a long-term relationship with such a brokerage firm can sometimes improve an investor’s chances of receiving an allocation, though it is not a guarantee.

Online brokerage platforms have expanded access to IPOs for retail investors in recent years. Brokers like Fidelity, Robinhood, SoFi Invest, Webull, and TradeStation now offer programs that allow their customers to express interest in upcoming IPOs. These platforms often partner with investment banks to receive a portion of the IPO shares, which they then make available to their eligible clients. While these avenues broaden access, the number of shares available to individual investors through these programs is often limited and highly competitive, especially for popular offerings.

Some specialized platforms and apps have emerged to broaden retail investor access to IPOs. These platforms, such as TradingBlock’s My IPO, connect investors to offerings and streamline the participation process. They may utilize systems like lotteries or indications of interest to manage demand and allocate shares. This approach allows a wider range of investors to participate in offerings at the initial public price.

Direct Share Programs (DSPs) or Direct Stock Purchase Plans (DSPPs) are less common for IPOs. A few companies might offer shares directly to the public without a traditional underwriter. However, this method is rare for initial public offerings, as most companies rely on investment banks to facilitate the complex process of going public and distributing shares.

Key Considerations Before Investing

Before participating in an IPO, investors should understand the process and conduct diligent research. The IPO timeline begins with the company filing a registration statement, known as Form S-1, with the U.S. Securities and Exchange Commission (SEC). This document contains information about the company’s business model, financial statements, risk factors, and the intended use of capital. The SEC reviews the S-1 filing, and the company may submit amendments based on feedback, a process that can take weeks to months.

Investors should read the preliminary prospectus, part of the S-1 filing, to make an informed decision. This document provides details such as the company’s history, management team, industry outlook, and the specific terms of the offering. Analyzing the company’s financials, including its income statement, balance sheet, and cash flow, helps assess its financial health and growth potential. Understanding the identified risk factors is also important, as IPOs carry speculative characteristics.

Brokerage firms and regulatory bodies establish eligibility and account requirements for IPO participation. Investors must have an active brokerage account that meets certain criteria, which can include minimum account balances or a history of trading activity. Some firms may require household assets ranging from $100,000 to $500,000, excluding certain retirement accounts.

Investors must also meet Financial Industry Regulatory Authority (FINRA) requirements, which involve answering qualifying questions to ensure the investment is suitable for their financial situation and risk tolerance. Individuals associated with the financial services industry may be restricted from participating in new issue offerings due to FINRA rules.

Steps to Participate in an IPO

After completing research and meeting account requirements, the next step in participating in an IPO involves formally expressing interest. This is done by submitting an “Indication of Interest” (IOI) through your brokerage platform. An IOI signals your desire to purchase shares and specifies the maximum number of shares you are interested in acquiring within the preliminary price range. Submitting an IOI does not guarantee an allocation of shares; it merely communicates your interest to the brokerage firm.

The share allocation process follows once the company and its underwriters determine the final IPO price, usually the night before the stock begins trading publicly. Shares are allocated among institutional and retail investors, with institutional investors typically receiving the majority, around 90% of the offering. For retail investors, if an IPO is oversubscribed, allocation often occurs through a computerized lottery system. In some cases, a pro-rata allocation may occur, where investors receive a proportion of the shares they requested based on the level of oversubscription.

Once an allocation is confirmed, your brokerage account will reflect the shares purchased at the IPO price. The settlement process occurs within a few business days after the shares begin trading on the exchange. On the listing day, the shares become available for trading on the public market, and their price will fluctuate based on supply and demand. Your shares will appear in your account, ready for trading or held as a long-term investment. Selling IPO shares too quickly after listing, a practice known as “flipping,” may lead to restrictions on future IPO access from some brokerage firms.