How To Buy Stocks At An IPO

One of the best times to buy shares of a company’s stock is at an IPO. Many major companies traded at their lowest prices during their first public offering and have never traded at these levels since. Google is a perfect example of this. Google’s stock was priced at $85 per share during its IPO and has never since returned to those levels. Today the stock trades at over $520 per share.

2C256 /%What Is An IPO?

An IPO is short for initial public offering. It is the first time that a private company offers shares of its common stock to the general public. Private companies hire an underwriter to help them determine a price and market for their common stock. Major investment banks like Goldman Sachs. Morgan Stanley, Bank of America. JPMorgan Chase, and Citigroup underwrite many public offerings. In return for their services, underwriters are paid in cash and shares of stock.

Underwriters and insiders are prohibited from selling their shares on the market for a minimum of 90 days. Some companies crash as soon as the lockup period is over since many investors dump their shares.

Should You Invest in An IPO?

You need to do your homework before investing in an IPO. IPO’s are incredibly risky because you are never sure what a stock will do in its first few days of trading. Some IPO’s take off like Google and generate remarkable returns for investors. Other IPO’s like General Motors were priced much higher and now trade at a much lower level. You should feel comfortable buying shares of quality companies that are priced reasonably when they first come to the market. If an IPO price is too high, you should wait until shares drop to a price that you deem appropriate.

How Do You Participate In An IPO?

Initial public offerings are typically only offered to large investors and institutions. If you have a high net worth and an account with one of the large underwriting firms then you can get in on an IPO. If you are a smaller investor, you probably won’t get the opportunity to participate in the best IPO deals.

You can always check with your broker for the latest IPO deals. Discount brokers like TD Ameritrade and Schwab do allow ordinary investors to participate in IPO’s. You just need to request a prospectus and to read through the registration statement priced with the SEC. You won’t get a price until the IPO is almost ready to be sold on the market. For IPO’s open to the public, you can subscribe to the offering as long as you meet the minimum investment requirement for the IPO.

Shares at an IPO cannot be purchased on margin.

People love to buy IPO’s because they are so exciting. There is always the allure of buying a small company one day and flipping it for a quick profit a few days later. Don’t get caught up in the hype! You should only buy stocks at an IPO that you think make good financial sense and can make you money over the long term.