IPO Investing Explained: How Retail Investors Can Buy IPO Stocks

If you’re a retail investor looking for new ways to diversify your portfolio, chances are you’ve come across IPO investing. Unfortunately, there’s a lot of confusion around how IPO investing works.

Investors don’t know how IPO investing works or where to buy IPO stocks. This guide will offer clarity. Let’s take a closer look at what IPO investing is and how retail investors can participate.

How IPO Works

An Initial Public Offering, or IPO, is the process by which a private company sells its shares to the public for the first time. Before a company launches an IPO, it has only had angel investors and venture capitalists. But once an IPO is launched, the company goes public, and traders can buy its shares through a public exchange like NASDAQ or the New York Stock Exchange.

Here’s a brief breakdown of the IPO process:

Company goes public

A private company decides to go public mainly to raise capital and fuel growth. IPOs are facilitated by investment banks.

Price and share allocation are set

An investment bank, registered with the SEC to offer underwriting services, assesses demand from big institutional investors and sets an initial price band.

Shares are sold

Shares are sold on IPO day, and trading begins on the stock exchange.

Allotment takes place

If an IPO is oversubscribed, a computerized lottery determines who gets shares.

How Retail Investors Can Participate

So how can retail investors grab a piece of a newly public company? Follow these steps:

Create necessary accounts

Here’s a thing about IPO investing: You can only do it through a brokerage account. Open an account with a reputable broker or ask your existing provider about their IPO services.

Get IPO shares before trading shares

This will help you get ahead of other retail investors. Many reputable brokers, such as SoFi, allow you to participate in IPOs before they trade on an exchange. You can participate with no minimums.

Research companies

Do more than just keep an eye on upcoming IPOs. Shortlist some companies and do thorough research on their business models, financial histories, and growth. How does the company plan to use the capital being raised? Such questions will help you choose the most profitable IPO.

Place an application

Once you’ve selected the IPOs you’d like to participate in, submit an indication of interest (IOI). Make sure you submit the application during the specific offering period.

Wait for allotment

If you’ve shown interest in a super-popular IPO, you’d most likely enter an allotment. A lottery system will be used to determine which retail investors get the shares. You might receive all, some, or none of the shares you requested.