Investing in stocks can give your massive return; that is if you invest in a profitable company because as long as the company is making profits, you are sure of increase in dividend payment. Another way invest in the stock market and make plenty returns is by investing in IPO before it gets to the general market.
Before delving deeper into the topic “How to invest in an IPO for beginners,” I think it would be very helpful to first define what an IPO is. In the simplest of terms, an IPO basically stands for Initial Public Offering. An Initial Public Offering (IPO) is the prize value or prize at which the share of a company is sold to the general public. If a company decides to sell shares to the public for the first time, then it is called an Initial Public Offering or IPO. You can actually invest in the share of a company during the waiting period before it gets to the general public.
IPOs create hype in the market. If a new company holds great promise, it is enough to make investors fight over for its initial offerings. It provides investors the first opportunity to invest in a company trading on the public market for the first time. The catch to this is that, IPOs are sold for a low price but this can double or triple in a matter of days. Wise investors can make significant profits by flipping their IPO shares.
In this article, I will explain how the Initial Public Offering (IPO) works and take it a step further by giving you tips on how you can invest on IPO before it goes public and make money. It is good to note that not all IPO are worth investing on before it goes public as some stock brokers will advise you to allow the stock to gather momentum for the first few weeks or months before you can invest in the stock, but in most cases, the value of most IPO’s skyrocket after it hits the stock market and if you invested in it before it got to the public, you will make massive returns from it.
How Initial Public Offer Works
When a company wants to go from Limited Liability Company to a public liability company or when a public liability company wishes to expand and invest in other businesses, there is need to raise enough capital and the interest rates that comes with bank loan discourages the companies from using an option to get loan from the bank. The only other option they have is to sell the shares of their company to the general public in exchange for the money.
If a company decides to sell its shares to the general public, it doesn’t just go straight to the stock exchange market to list the shares; the company contacts an investment bank. The investment bank and an underwriting company may decide to buy off the shares and resale to the market if the estimate that the value of the shares will increase once it hits the market. The investment bank goes ahead to file the company’s shares in the stock market. Before a stock goes public, there is a waiting period of up to 2 months to allow the stock market commission verify all the details the company gave to them. If you buy shares during the waiting period it means that you are investing in IPO before it goes public.
From the explanation I gave above, you see that you need insider information to know when a company’s IPO is in the waiting period; the next section of this article will be on how to get started in getting IPO’s before they go public.
Investing in an IPO Online Like a Pro Before It Goes Public – A Beginner’s Guide
1. Have An Account In An Investment Bank
From the brief explanation that I gave above on how the IPO procedure works, you can see that an investment bank is involved in the whole process of getting an IPO into the stock market. To get information on which IPO is currently in SEC waiting period, you have to have an account in a big investment bank. You have to be active with trading in your investment accounts, and also you can get close to your account officer to help you get info on which IPO will be going public soon, so you can buy during the waiting period.
2. Look for the Latest IPO Issues
Search for companies which are about to issue IPOs. This job is pretty easy to do since IPOs are heavily advertised. Aside from the fact that there is a statutory requirement for an IPO to be advertised, companies would want to make sure that their issue will be a success, hence, more advertisements on their part. Other opportunities can be found through online resources such as the Securities and Exchange Commission site. These sites offer information on upcoming IPO issues.
3. Research on the Company-: After you have gotten the basic information on the companies that their IPOs are SEC verified, you have to carry out an extensive research on the company.
4. Read the Company’s Prospectus
Before applying, always make sure you review the preliminary prospectus of the companies issuing IPOs. The prospectus is a document including an invitation for the public to buy shares and other information related to the company. Information that must be included in a prospectus includes the company’s financial situation, its management, and its operation. Prospectus also includes risk factors in buying IPOs. These are the worst-case scenarios that can happen to the company’s shares in the stock exchange market.
Prospectuses are usually an initial indication of an investment’s potential success or failure. By evaluating each prospectus of the companies issuing IPOs, investors can have an idea on what company to invest their money into.
5. Determine the Dilution of an IPO
The dilution is a portion of the prospectus showing the original investor’s average amount of money per share. More often than not, the public offering is usually above this amount. If this is not the case, it may mean that the value of the business did not gain. The dilution should also indicate the percentage of the original investors who will drop their shares when the company goes public.
6. Compare Offering Price
Investors need to consider the amount they are willing to invest in an IPO and the return they hope to gain. These factors play a major role in determining which IPO to choose. It may be worth the risk to take shares from a company with a great potential but offers a high price for their share. But then again, it may be a good deal to take shares offered at lower prices if the shares will not be kept in long terms.
7. Picking the Preferred IPO
If the right IPO has been chosen after weighing in all the pros and cons of the other IPOs, then it’s time to buy it. One way to pick the preferred IPO is to find the right bank that will be responsible in managing the sale. Through this, it may be possible to buy shares directly from the bank even before the initial offering occurs.
8. Invest In a Company That Has a Strong Underwriter
An underwriter is a company that assumes responsibility of the company’s share or they most times buy off the shares to sale later to the public. A strong underwriter company cannot invest in the shares of a company if they don’t have the full faith that the stock will increase in value in the nearest future and bring them returns. So invest in an IPO that has the backing of a strong underwriter company; because for the underwriter company to back up the company’s IPO, they know the value of the shares will skyrocket once it hits the stock exchange market. Some top underwriter companies are Goldman Sachs in the US and Lloyds in the united kingdom.
9. Be Cautious of Initial Public Offerings from New Companies
Investing in the IPO of a new company is a dicey affair because the new company doesn’t really have past information and records that you can cross check to know the past performance of the company in order to predict what the future performance of the company’s shares in the stock market will be like. It is better to invest in the IPO of a company that have been in existence and operation for a while but just decides to go public to raise capital to expand the business; as the past performance and financial records of the company will give you an idea of how valuable the company’s IPO will be in the stock market.
10. Consult Your Stockbroker
Another way is to hire a stockbroker who will do all the necessary things on the investor’s behalf. If have done your own background check on the company and are not still sure of the IPO, you can consult your stock broker to run an ID on the share in question. Most stock brokers already have information on IPO waiting to get to the public, you can seek the broker’s opinion and advise to know if the stock is worth investing on before it gets to the public.
Aside from giving advice on how to invest in an IPO, stockbrokers can also manage an investor’s stocks. Resorting to online services is also a way to buy IPOs, which lets investors to buy and sell stocks on their own. You have seen the process and IPO passes through before it gets to the general public, I have also dropped some few tips that will help you get knowledge of, investigate and invest in the IPO of a company before it gets to the general public.
10 Factors to Consider before Investing in an IPO
Investing is a good way to have passive income to supplement your existing income. However, not everyone who invests gets to reap the benefits of their investments. Some people buy into some shares and stocks and, at the end of the day, are left with mere share certificates with no solid financial value.
Initial public offers are even trickier because the company hasn’t been tested and cannot guarantee to be trusted in the stock market. Most of the time, investors buy shares with the hope that their investment grows over time. But if that doesn’t happen, that’s hard-earned money flushed down the drain. So what are the factors you should consider when you want to invest in an IPO, so you don’t end up losing your money?
a. The company itself
Your first step is to carry out an objective research on the company that you are about to invest in. Private companies are a lot more shrouded in secrecy than public companies. And it might be difficult to uncover as much information as you would need to make a decision just from looking at the prospectus, which has most likely been written by them. Therefore, it’s your duty to conduct an objective personal research on such companies. This will help you uncover any potential weaknesses or dangers.
b. Facts from the prospectus
The prospectus is not just some fancy book that holds the forms you have to fill when investing in an IPO. Usually, it contains a whole lot of information about the company, its future plans, its strategies, its financial statement and earnings over the years, its managers and other vital information. Just by reading the company’s prospectus, you will be able to look into the company’s prospects for growth as well as its potential future and sustainability.
c. The Company’s underwriters
Another important factor to consider is the company’s underwriters. Yes, the quality of the company’s underwriters can tell you a lot about the company. Good and reputable underwriters are usually quite picky about the type of company they choose to do business with. So, if the underwriters are good, the company will most likely be a reputable one.
d. The truth underneath the hype
Don’t get carried away by all the hype that underwriters use to ensure that they sell as much IPO stocks as they can. Most of them tout IPO’s as “once in a lifetime” opportunities and make them look like you are missing out on something big if you don’t seize the opportunity. But you must always learn to look beyond this and invest in good and viable offers and not just because it’s an IPO.
e. The lock-up period
Usually, underwriters sign contracts with company officials barring them from offering any company stocks for sale with a period of three to twenty four months. This contract when signed is legally binding and must be strictly adhered to. This period is known as the lock-up period. What usually happens after this period lapse is that officials rush off to sell the stocks as soon as they are free to do so, thereby forcing down the prices of the stocks tremendously. But if the company is a strong one with good prospects, the opposite would happen; most insiders would prefer to hold on to their stocks. Therefore, it’s always better when you hold off investing in an IPO until after the lock-up period has lapsed.
f. Company’s objectives for going public-: Another important factor to consider is the company’s reasons for deciding to go public. Find out why the company is trying to raise funds and how viable its expansion or investment plans are.
g. Nature of the company’s business-: It also helps to always invest in a business that you understand. You must ensure that you properly understand the nature of the company’s business as well as its position in the industry it operates in.
You should also carefully consider the issue of pricing. It is important to avoid overpriced stocks because when a stock is over-priced, prices would usually drop back to its fair price. Hence, you must try to compare the prices of the IPO to the market prices of similar stocks in the market.
i. The company’s management
The management and executives of the company are highly responsible for the success or failure of the company. Therefore, you need to ensure that you look at the credibility of the company’s management, their experience, history and level of competence.
j. Customers and goodwill-: These are also key factors and major determinants of the performance of a business in the long run.
Frequently Asked Questions
How Do You Buy IPO At The Beginning Price?
- In order to buy IPO at the beginning price, you should work with your online brokerage. Most of the major online brokerage firms have cut deals with select investment bankers to get shares of IPOs before it goes public.
- Build a relationship with an investment banking firm.
- Buy a mutual fund
How Do You Get Coinbase IPO Before It Goes Public?
You should call the broker dealer firm and indicate you are interested in buying into the IPO. In most cases, you will need to open an account with the broker dealer.
How Do You Buy Rivian Pre-IPO Stock?
In order to participate in Rivian pre-IPO stock, you need to use an IPO investing app like Freedom Finance (NASDAQ: FRHC), TD Ameritrade, or Fidelity.
How Do I Buy Stock Before IPO?
Make use a ‘Specialized Broker’. Brokers and financial advisors often take part in pre-IPO trades. They may have acquired stocks that they are willing to sell or represent sellers who seek buyers. You can ask your current broker about pre-IPO stocks or use a broker that specializes in pre-IPO sales.
Can You Buy Pre-IPO Stocks?
Yes, in some cases, but it is important to note that prior to the IPO, the only people who own the stock are professional investors, including venture capitalists, private equity firms, and company insiders such as founders and employees.
Can You Sell IPO Shares Immediately?
Yes. You can expect SEC and contractual restrictions on your freedom to sell your company stock immediately after the public offering.
What IPO Should I Buy In 2022?
What Is An IPO And How Do You Invest In One?
An IPO is an initial public offering. In an IPO, a privately owned company lists its shares on a stock exchange, making them available for purchase by the general public. Many people think of IPOs as big money-making opportunities—high-profile companies grab headlines with huge share price gains when they go public.
If you want to purchase shares of a stock (invest) in an IPO, you will most commonly have to go through a broker. Some firms also let you buy shares at the offering price as opposed to the trading price once the stock is on the public market.
Should I Buy IPO First Day?
To a large extent, you should be guided by your findings on the IPO before buying on the first day. But, as an average investor, buying shares on the first day of trading would have resulted in gains for half of the investments made.
How Long Before You Can Sell An IPO Stock?
After an IPO, there is typically a 180-day lockup period during which you can’t sell your company stock. Once the 180 days have passed, you’ll need to decide whether to sell some or all of the company stock you own.
Why Are There So Many IPOs In 2022?
Many companies have opted for IPOs since the end of 2020, primarily due to the impact of the Covid-19 pandemic on business and exuberant stock market activity.
How Do You Find Pre-IPO Companies?
If you have invested in the past, get in touch with your stockbroker or investment adviser so you can find pre-IPO tech startups worth investing in.
What Are The Risks Of Investing In An IPO?
- Shares may or may not be allotted in the IPO issuance
- To make the complete analysis, there can be insufficient information available
- Regulatory issues also need to be factored
How Do You Buy Pre-IPO Stock At TD Ameritrade?
Here’s how you can get in on a Pre IPO when TD Ameritrade is a member of a selling group:
- If you are not yet their client? You can Call 800-454-9272 or open an account.
- If you are already their client? Log in to your account and select IPOs from the Trade tab, or call 866-678-7233 for assistance.
At What Time does IPO Allotment Happens?
IPO allotment happens in 7 days. The registrar of the IPO is expected to finish and confirm allotment of to the successful bidders within the 7 days. The IPO allotment status can be checked via the website of the registrar.
Where Can You Find Out About Upcoming IPOs?
IPO investors can track upcoming IPOs on the websites for exchanges like NASDAQ and NYSE, and these websites: Google News, Yahoo Finance, IPO Monitor, IPO Scoop, Renaissance Capital IPO Center, and Hoovers IPO Calendar.
What Will Coinbase IPO Price Be?
Coinbase Global’s (NASDAQ: COIN) initial public offering (IPO) pretty much lived up to the hype. The cryptocurrency exchange stock opened 52% above its reference price of $250. And Coinbase’s public debut became the seventh-biggest U.S. IPO ever, based on market cap at the close of the first day of trading.
How Do You Buy Stock At IPO TD?
To purchase IPO shares, you must open an account with TD Ameritrade, then complete a personal and financial profile, and read and agree to the rules and regulations affecting new issue investing. Each account being registered must have a value of at least $250,000, or have completed 30 trades in the last 3 months.
Should You Invest In Bitcoin Right Now?
Yes, you can invest in Bitcoin right now, and as a matter of fact, the main cryptocurrency and the safest one to invest in today is still Bitcoin. It has the biggest market capital and is considered as “digital gold” and a high value.
Is There An IPO Alert App?
Yes, and it is IPO Calendar app. This app provides you Pricing, Upcoming, Filing, and Withdrawn IPO Calendars and stock research. The Insider Transactions reveal available insider trading records including date, type, shares, value, insider name, etc. for the stock.
How Can You Buy U.S. Or International IPOs?
Here’s how to do it:
- Log in to your bank’s net banking account.
- Go to the investment section and select the IPO option.
- Fill your investment and bank account details to complete the verification process.
- Later select the IPO you want to apply for.
- Enter the number of shares and bid price.
- Read and accept ‘terms and conditions’ documents.
- Submit your application.
Can You Buy IPO On Robinhood?
Sure, you can buy IPO on Robinhood and as a matter of fact, Robinhood typically allows customers to place limit orders to purchase shares of IPOs on their opening day around 8:00 AM ET.
What Are The Eligibility Requirements To Trade IPOs?
First, you’ll need to meet at least one of the following eligibility requirements for participating in an IPO: Either $100,000 or $500,000 in household assets (depending on the IPO; this amount excludes institutional or annuity assets, such as 401(k), 403(b), and annuity contracts).
Do Stocks Drop After IPO?
It depends on the stock and interestingly, the IPO is one of the few times when the company sells shares for its own benefit. During this rare and very short event, the ideal outcome after the sale is for the stock price to trade even or decline during the first days and weeks of trading.
How Long Do You Have To Hold A Stock To Get The Dividend?
You only need to own a stock for two business days to get a dividend payout. Technically, you could even buy a stock with one second left before the market closes and still be entitled to the dividend when the market opens two business days later.
How Do Retail Investors Get Access To IPOs?
Invite only. To get early access to an IPO, you need an invite—which can come from either the company itself, an underwriter (the party helping set the price and buy and sell the securities) or increase your own brokerage firm.
How Does IPO Make Money?
This is how IPO makes money; if you participate and buy stocks in an IPO, you become a shareholder of the company. As a shareholder, you can enjoy profits from the sale of your shares on the stock exchange, or you can receive dividends offered by the company on the shares you hold.
Are IPOs Good Or Bad?
While not every IPO is an unworthy investment, even those that seem like a “safe” investment put off the illusion that they aren’t risky. That is simply not the case, as IPOs are one of the most dangerous investments you can make. There are many high risk and low-risk investments.
What Is The Average IPO Valuation?
The median valuation of companies in the United States before their IPOs between 2000 and 2020 was approximately 267 million U.S. dollars. However, the median value of the U.S. companies before their IPO in 2020 reached 577 million U.S. dollars.
How Does Buying And Selling Stock Shares Work?
This is how buying and selling stock shares work; your broker passes on your buy order for shares to the stock exchange. The stock exchange searches for a sell order for the same share. Once a seller and a buyer are found and fixed, a price is agreed to finalize the transaction.
What Is An Initial Coin Offering?
An initial coin offering (ICO) is the cryptocurrency industry’s equivalent to an initial public offering (IPO). A company looking to raise money to create a new coin, app, or service launches an ICO as a way to raise funds. Interested investors can buy into the offering and receive a new cryptocurrency token issued by the company. This token may have some utility in using the product or service the company is offering, or it may just represent a stake in the company or project.
What Does FUD Mean In The Stock Market?
FUD stands for Fear, Uncertainty, and Doubt. Fear of a market crash or sell off. Investing too little or too late.
What Does The Term Frozen Mean In The Stock Market?
In general, freezing an account, funds or a whole market is equivalent to immobilizing it in order to correct a temporary situation. When the market freezes, trading stops. When a trader’s account is frozen, she’s shut out until her account is thawed out. There are multiple reasons an account, or a stock exchange, might be frozen.
What Time Of The Day Does The Stock Market Stop Trading For The Day?
Regular trading hours for the U.S. stock market, including the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq), are 9:30 a.m. to 4 p.m. Eastern time on weekdays (except stock market holidays).
What Usually Happens To Stock Price After IPO?
Investors usually accept prices that are lower than a company’s owners would anticipate. Consequently, stock prices after an IPO can rise, and indicate that the company could have raised more money. But too high an offer price, and possibly flawed investor expectations, can result in a precipitous stock price fall.
How Does An IPO Make You Rich?
This is how IPO makes you rich; when the IPOs are listed on the Stock Exchange, they usually get listed at a premium, meaning at a price that is higher at which they were issued. Usually, investors can make a lot of profit by selling these shares (which are listed at a premium price on the Stock Exchange).
Is IPO Allotment First Come First Serve?
No, IPO doesn’t get allocated based on a first-come, first-serve basis. The allotment of shares in case of an IPO depends on the interest of the potential investors. If a lot of investors show interest in any particular IPO, then the allocation of shares to the retail investors is done through a lottery.
What Are The Benefits Of Trading CFDs?
The Advantages of CFD Trading are;
- Greater Leverage in Trades.
- Earnings Potential in Both Bear and Bull Markets.
- Flexible Lot Sizes.
- Lower Trading Costs.
- Broader Hedging Options.
- No Expiration Date
Do IPOs Usually Go Up?
Yes, most IPOs go up and surge on their first opening day because on the opening day there is no one to sell the stocks immediately as compared to older IPOs so the company gives 3 days for the investors to invest and on the fourth day it releases its share price after investors invest.