How to invest in IPOs

The result was an initial public offering on Wall Street that showed no signs of stopping anytime soon.

So far, there have been 475 IPOs in the United States in 2021, according to data provider Dealogic. It is already more than the 457 IPOs which took place in 2020. And there are several more IPOs planned on the horizon, including Instacart, Robinhood, and Epic Games.

The IPO frenzy has also resulted in a number of historic highs and record debuts on the stock exchange.

“IPOs are really exciting, often involve trendy and trendy companies, and sometimes the opportunity represents a chance to get into the ground floor of a business that is poised for huge future growth. “said Liz Young, head of investment strategy for the fintech company. at SoFi. “However, there is a definite risk.”

So how can you start investing in IPOs? Here’s what you need to know.

What is an IPO?

An IPO is when a company first offers shares to the public on the stock exchange. Selling shares to the public allows the company to have more access to capital.

How does an IPO work?

A private company looking to go public usually works with an underwriter, usually an investment bank, who buys all of the available shares at a fixed price and ultimately sells them back to the public. They also assist with the registration process with the Securities and Exchange Commission by preparing a prospectus before the IPO. The prospectus is a financial information report that presents the risks and opportunities for a company looking to go public. It also includes more information about the company, the securities and the offering to potential investors.

The SEC must approve the offer before the company can go public.

There are different ways for companies to go public:

  • Direct registration: In a direct listing, the company is listed directly on the stock exchanges and sells the existing shares to the public immediately without the assistance of an underwriter or an investment bank. Direct listings allow companies to go public without going through the IPO process Some companies prefer this method because it typically generates more money per share than a traditional IPO. Palantir and Asana are just two examples of IPOs that have followed the route of direct listing.
  • A Special Purpose Acquisition Company (SPAC): This method has become more and more popular over the past year. A SPAC is formed when a group of investors creates a publicly traded shell company. Called a “blank check company,” the company then sought to merge with a private company in order to help it raise funds faster than it would have done through an IPO. Galactic Virgo (SPCE) and DraftKings are two high-profile examples of companies that have recently joined the PSPC craze.
No slowdown in sight for IPOs or PSPCs

Do your homework

Before investing in an IPO or SPAC, be sure to do your due diligence by learning as much as you can about the company.

This can be somewhat difficult because private companies are not held to the same reporting requirements as public companies and generally do not disclose financial and other information about companies.

But companies that plan to go public through an IPO on a U.S. stock exchange, like the New York Stock Exchange or NASDAQ, are required to file an S-1 form with the SEC. The S-1 prospectus filing includes more information about the company’s team, target market, their financials, expected share price range and number of shares issued. You can search these forms on the SEC website.
Roblox goes public and is instantly worth over $ 45 billion

Once you’ve determined which potential IPOs you would like to invest in, read the company’s S-1 prospectus and research details about the company’s finances, valuation, why the company is listed and the use of the fund.

“IPOs are inherently risky investments,” Young said. “Interested investors should definitely read the company’s prospectus and look for a strong and established underwriter.”

Other company information that you might want to review includes their competitors, company updates, or press releases, which can provide insight into current shareholders and the company’s business model. These elements can also help you assess the potential for future growth as a public company.

Find a brokerage

The requirements for investing in a traditional IPO can vary from broker to broker.

“Typically, investing in IPOs prior to listing on major stock exchanges has been limited to institutional investors and high net worth individuals,” Young said. Although more recently, some companies have offered access to IPOs to average investors.

For example, Fidelity requires investable assets ranging from at least $ 100,000 to $ 500,000 to participate in an IPO. But other brokerages, like SoFi, require a minimum of $ 3,000 to participate in an IPO.

Investors can then enter an offer and request a certain number of shares. Demand is more an indication of interest than a guarantee. The day before the initial public offering, the investor will be informed and will have the opportunity to place a share order.

Invest as soon as it hits the stock exchanges

If you don’t meet the eligibility requirements or are unable to invest before an IPO hits the stock exchange, you can still enter after the company goes public. Online brokerage houses like Robinhood, Webull, Public, and TD Ameritrade allow you to buy and sell IPO stocks just like you would any other stock on the stock exchange, just minutes after listing. But in some cases, a stock will immediately start to rise, so you may not be able to buy at the IPO price.

“There is no guarantee that a stock will continue to trade at its initial offering price or above once it begins to trade on a public exchange,” said Robert Beauregard, spokesperson by Fidelity. “That said, the reason most people invest in IPOs is the opportunity to invest in the business relatively early in its life cycle and take advantage of potential future growth.”

– CNN’s Paul R. La Monica contributed to this report.

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