How To Invest In IPO Stocks: 5 Tips & Things To Know

In this article, we will be looking at the key tips for investing in an IPO stock.

Updated: May 18, 2024
Matt Crabtree

Written By

Matt Crabtree

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Going public is the dream of many companies, and with an Initial Public Offering (IPO) a company can launch its stock on the open market and raise capital to expand its business. Investing in an IPO stock can be both an exciting and risky venture — but with the right approach, you can increase your chances of success.

In this article, we will be looking at the key tips for investing in an IPO stock, so you can make the most of this high-risk, high-reward opportunity.

What Is An IPO?

If you’re an investor, you’ve likely heard of IPO stocks. But what exactly are they?

IPOs (initial public offering) are when a private company becomes public by selling its stocks to investors for the first time.

This is different from private companies that have already gone public — when a company is already publicly traded, its shares are known as “secondary stocks”.

With an IPO, you’re buying the first batch of stocks that a company is issuing. These stocks are carefully crafted to give the company the best chance possible at raising capital. Companies will often issue new stocks to fund additional research, development, and growth.

IPO stocks are attractive to retail investors for a couple of reasons. First, IPO stocks are usually offered at a discounted rate, and investors can sometimes benefit from the rise in price that often happens when a company goes public. Second, investing in an IPO is a great way to get in early on a company that has a lot of potential.

It’s important to note, however, that investing in an IPO can be risky. These stocks are more volatile than secondary stocks, so they may experience some dramatic swings in price. Additionally, an IPO can be a good opportunity for insiders to cash out, so it’s important to look out for these cases.

Overall, IPO stocks can be an exciting and potentially lucrative investment opportunity. However, it’s important to do your own research and make sure that you understand the risks involved. That way, you can make a smart decision about where to invest your money.

IPO Process

When a company is about to become public, they must first file an initial registration statement with the appropriate securities exchange authority (such as the Securities and Exchange Commission and prepare a prospectus outlining the company's finances, operations, and management.

The company then appoints an underwriter, or underwriting syndicate, to assist them in pricing the offering, marketing the IPO, and overseeing the sale of the company’s shares.

The company and its underwriters then set the stock price for the IPO.

Finally, after a set minimum share purchase requirement is met, potential investors can buy the stock. Once the stock is available, individual investors can buy and sell it on the exchange, just like any other publicly traded company.

Where Can I Invest In An IPO?

There are several different ways of investing in IPO stocks — let's take a closer look at the most popular strategies.

Brokerage Firms

One of the most popular methods of investing in IPO stocks is through the brokerage firm you use for the rest of your investments. Most of the major national brokerages offer the ability to purchase shares of IPO stocks through their platforms.

This strategy often requires you to pay a higher transaction fee for the privilege of purchasing the stock in its earliest stages, but it is usually a fairly straightforward and accessible way to invest in IPO stocks.

Investment Banks

Another option is to invest directly with an Investment Bank.

These banks offer shares to investors either through their own Private Placements or through their network of Institutional Investors.

Private Placements are a great way to get in on an IPO stock at a discounted rate, but these deals often require a large upfront payment and often have time restrictions on when the funds must be returned.

Institutional Investors, on the other hand, are often private equity firms or venture capital firms who may offer access to certain new IPOs.


Alternatively, you can also consider investing in IPO stocks through Exchange Traded Funds (ETFs). These funds allow you to purchase shares of a basket of stocks from somewhere like the New York Stock Exchange, rather than having to purchase individual stocks.

If a portion of the ETF portfolio consists of newly-IPO stocks, you can get exposure to these stocks without having to purchase them individually.

How To Invest In IPO Stocks

1. Do Your Research

Before investing in an IPO, it’s important to do your due diligence. That means researching the company and its products, taking stock of the industry and competitors, and getting comfortable with the company’s financial and operational health.

This involves reading the company's prospectus, SEC filings, news reports and other financial documents, so you can make educated decisions about whether investing in the IPO is a good idea for your portfolio.

2. Consider Investing In Companies You Know And Understand

When researching potential IPOs, you may come across some companies that you know and understand better than others. If that’s the case, those may be good IPOs to consider investing in first.

This is because when investing in companies you know and understand, you’ll have a better idea of how the company’s products and services fit into the market, how successful the company could be, and how much risk you’d be taking on.

3. Get Signed Up With An IPO Investment Platform

Once you’ve identified a few IPOs that you’d like to invest in, the next step is to get signed up with an IPO investment platform. There are a number of different platforms available, so be sure to do your research and find one that fits your needs.

Once you’ve found the right platform, setting up investment accounts is easy and enables you to make an investment and track it in real-time.

4. Buy On The IPO Day

Once you’ve identified an IPO you’d like to invest in, make sure to buy on the IPO day itself. This is because on the IPO day, the company sets the initial share price and the supply of shares is typically limited. By buying on the IPO day, you’ll be able to take advantage of the initial surge of stock value and also get in on the ground floor.

5. Hold Onto Your Stock Long-Term

Once you’ve invested in an IPO, it’s important to hold onto your stock for the long-term. Many investors make the mistake of selling too quickly after an initial surge of value, only to see the company’s stock grow in value over time. So, to maximise your returns, it’s generally best to hold onto your stock and let the long-term trends guide your moves.

Investing in IPOs can be an exciting and rewarding experience. By following the steps outlined here, you can get started on the right foot and have a great chance of earning significant returns on your investments. Good luck!

Who Can Invest in IPOs?

So who can invest in an IPO stock? Generally, the answer is anyone. If you have an account with a broker-dealer that is handling the IPO transaction, you can purchase shares of the stock as long as you meet the criteria to do so.

Depending on the broker, this criteria might include having a minimum account balance or agreeing to a set number of trades or investment amounts.

Besides the broker-dealer requirements, there are also regulations imposed by the Securities and Exchange Commission, the federal agency that oversees stock exchanges. For example, the SEC requires that all investors meet certain criteria, such as being a certain age and passing an “investing knowledge” test.

This helps to ensure that only informed investors, who can handle the risks associated with investing in IPOs, are able to participate.

Additionally, there are some cases where an IPO offering is more restricted. For instance, when a company does an IPO, they might offer the stock only to a select group of private investors, such as employees, friends, and family.

These offerings are known as “non-public” IPOs and usually require that potential investors submit proof of their identity and qualifications to participate.

How To Manage Risk When Investing In IPOs

When investing in IPOs, or initial public offerings, there are certain risks involved as with any investment. It is important to understand these risks in order to make intelligent decisions and to manage your risk appropriately.

1. Value Your Investment

Understand what the company is worth and its potential worth prior to investing. Don’t let yourself get caught up in the hype around the stock and settle for an inflated value/ IPO price.

2. Diversify Your Portfolio

While you may be tempted to focus solely on IPOs, it’s important to have a balanced portfolio of different investments. This allows you to spread out the risk of investing and can help protect you from loss.

3. Be Aware Of The Impact Of The Underwriters

The underwriters play a large role in an IPO as they are responsible for setting the price and managing the stock offering. Be sure to research the underwriters and make sure you’re comfortable with them.

4. Be Mindful Of The Risk Of Insider Trading

Before you buy IPO stock, it is important to be aware of any potential insider trading. Insider trading is illegal and can pose a very serious risk to your investments.

5. Consider A Staggered Approach

If the market looks favourable and you are comfortable with the risk, consider investing in the security on a staggered basis over time. This can help you take advantage of market shifts and maximise your returns without exposing yourself to too much risk.

You should also consider using strategies like dollar-cost averaging and hedging when investing in IPO shares. Dollar-cost averaging involves investing a set amount of money each month, regardless of whether the stock price is going up or down.

This way, you can take advantage of any dips in the stock price. Hedging involves taking opposite positions in the stock market, so that if one stock goes down, the other goes up, enabling you to reduce your risk.

Take Advantage Of Professional Investment Advice

If you’re looking to buy pre IPO stocks, you’re likely aware of all the potential profits you can make from investing. But with the increased potential for profits, IPO trading also comes with increased risks.

To maximise your chances of success, it’s important to take advantage of professional investment advice.

Here’s why:

1. Gain A Deep Understanding Of The IPO Market

Professional investment advisers have typically been in the business for many years, and they have a deep understanding of all the nuances and nuances of the IPO market. This allows them to more accurately assess the risk/reward ratio of any potential IPO stock purchase.

They can also provide insights into the current market conditions, helping you make an informed decision about when to buy and when to sell your stocks.

2. Creating A Sound Investment Strategy

Professional advisers understand the complexities of the IPO market and know how to craft a sound investment strategy that’s tailored to your individual needs. This can help increase your probability of success when investing in IPO stocks.

3. Avoid Common Pitfalls

Consulting advisors can help you identify potential pitfalls and help you avoid them. They will also help you understand the importance of diversification and portfolio management, which are key elements of successful investing, regardless of whether you're buying IPO stock or not.

4. Understand The Regulatory Environment

IPO stocks have unique regulatory requirements that may be unfamiliar to novice investors. Professional advisers can provide insights into the expected regulatory framework and help you ensure you’re compliant with all the relevant rules and regulations.

5. Assistance With Due Diligence

Conducting due diligence on IPO stocks requires an in-depth understanding of the company, the industry, and the overall financial landscape. Professional advisers can provide insights into these areas and help you make the best decisions.

Robo Advisors

It’s also important to look into the benefits that a robo-advisor can offer. Robo-advisors are digital platforms for managing and investing your money, and they come with a whole range of advantages that can help you make the most of your IPO investments.

Robo-advisors are also incredibly cost-effective, with most charging significantly lower fees than a human advisor would. This makes them the ideal choice for investors who are looking to maximise their returns and save on costs.

Finally, robo-advisors offer a level of automation that manual investments don’t.

Not only can they keep track of your investment performance in real-time, but they can also make sure your investments are kept up-to-date and automatically reallocate your portfolio as needed.

This automation ensures that your investments stay on track without you having to constantly micromanage them.

When Should I Exit An IPO Investment?

In general, there are a few guidelines to consider when making a decision to exit an IPO stock investment.

1. Consider Your Original Investment Strategy

Having an exit plan in place before the IPO even begins is paramount. While they can be a great way to diversify your investment portfolio, you must set limits on the time and capital you are willing to commit to an IPO stock investment.

2. Pay Attention To The Fundamental Performance Of The IPO Stock

Is the company showing signs of growth? Are revenues increasing? Are there any changes in the competitive landscape that could negatively affect the company’s performance? Evaluating the company’s performance can give investors an indication of whether it is a good time to exit the investment.

3. Use Technical Analysis

Technical analysis looks at the stock’s performance history, including any peaks and troughs, to better understand how the stock is likely to move in the future. For example, if the stock has recently hit a peak, this could indicate that now would be a good time to sell the stock.

4. Stay Informed

Finally, investors should remain attuned to the news and rumours in the market. Any FUD (fear, uncertainty, and doubt in market sentiment) that could potentially have an effect on the stock price should be taken into account when making an investment decision.

Knowing when to exit an IPO is just as important as knowing when to enter the investment. Understanding when to close the deal can make the difference between a successful return on investment or a loss.

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