How to Get In on an IPO as an Individual Investor

An Initial Public Offering (IPO) marks the first time a private company offers its shares for sale to the public, allowing it to raise capital. For individual investors, an IPO represents an opportunity to potentially own a stake before shares trade widely on a public exchange. This article guides individual investors on how to participate in these initial stock offerings.

Accessing IPOs Through Brokerage Firms

Individual investors primarily gain IPO access through brokerage firms participating in the underwriting syndicate. Not all brokerage firms offer IPO access; larger investment banks and brokerages typically have the strongest relationships with companies going public. These firms receive an allocation of shares directly from the underwriting syndicate, which they then distribute to their eligible clients.

To be considered for IPO participation, investors must meet brokerage qualifications. Requirements vary but commonly include a substantial account size, active trading history, or a long-standing relationship. Brokerages may also consider financial sophistication or net worth. Some firms prioritize clients with significant assets under management, perhaps exceeding $100,000 or even higher, to qualify for IPO opportunities.

Brokerages manage internal allocation for retail clients based on their policies, often using a tiered system where clients meeting higher thresholds of assets or trading activity receive preferential consideration. The allocation process is not always transparent and can be influenced by the firm’s overall relationship with the client. Establishing a strong relationship with a brokerage firm that frequently participates in IPOs can be a beneficial first step for individual investors seeking access.

The IPO Application and Allocation Process

Once an investor has an account with a brokerage that offers IPO access, they can begin the application process for upcoming offerings. The first step involves expressing interest in a particular IPO, which is typically done through an online portal provided by the brokerage or by contacting their financial advisor. This expression of interest signals the investor’s desire to potentially purchase shares in the upcoming offering.

After expressing interest, investors may be invited to submit a conditional offer for shares. This offer is not a guaranteed purchase but rather an indication of the number of shares they would be willing to buy within a specified price range. During the book-building phase, institutional demand for the shares and the company’s valuation determine the final IPO price, which usually falls within the initially indicated range. The investment bank’s underwriters work to gauge investor interest and set a price that balances demand with the company’s capital needs.

The allocation decision is made after the final IPO price is set, and demand for popular IPOs often exceeds the available supply of shares. Brokerages allocate shares based on their internal policies, which may include methods like pro-rata distribution, a lottery system, or a discretionary approach favoring certain clients. Expressing interest or submitting a conditional offer does not guarantee an allocation of shares. If an investor is allocated shares, they will typically receive a confirmation from their brokerage detailing the number of shares and the final price.

Trading and Settlement After IPO

Upon successful allocation of IPO shares, the next phase involves the settlement process, which dictates when the shares are officially credited to the investor’s account and when payment is processed. The settlement period for IPOs typically follows standard securities trading practices, often taking one or two business days after the pricing of the offering. For example, if an IPO prices on a Monday, the shares might settle and appear in the investor’s account by Wednesday or Thursday, depending on the specific settlement cycle.

Once settlement is complete, the shares typically begin trading on a public stock exchange, marking the “first day of trading.” This is when the shares become available for purchase and sale by the general public in the secondary market. The initial trading activity can be volatile, with prices sometimes experiencing a significant increase, often referred to as a “first-day pop,” or, conversely, a decline. This immediate price movement is influenced by market demand, investor sentiment, and overall market conditions.

While retail investors are typically not subject to lock-up periods, it is important to be aware of them as they can impact market dynamics. Lock-up agreements restrict company insiders, such as founders, executives, and early investors, from selling their shares for a specified period, often 90 to 180 days after the IPO. This restriction aims to prevent a flood of shares hitting the market immediately after the IPO, which could depress the stock price. The expiration of these lock-up periods can sometimes lead to increased selling pressure on the stock.