How to Buy an IPO Stock – Everything You Need To Know About Buying an Initial Public Offering Stock

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Contents

    An initial public offering (IPo) is when a privately held company sells its shares to the general public for the very first time. IPOs are usually big news because they represent the beginning of a brand-new era for the company. Investors love IPOs because they provide a chance to make money off of something that might become a huge success. However, there are some risks involved with buying an IPO stock.

    The easiest way to purchase an IPO stock is to talk to your broker about opening up a position in the company. You’ll likely pay a commission fee to open the account, but once the IPO happens, you’ll be able to sell off your shares without paying additional fees.

    If you don’t like the idea of working with a broker, another option is to invest directly in the IPO. There are many online brokers that allow you to do just that. They’ll charge you a small fee each time you trade, but it’s nothing compared to what you’d pay with a traditional broker.

    Another way to buy an IPO stock is to find one yourself. Some people prefer to wait until the IPO date arrives and then jump into the action. Others simply look for IPOs that fit their risk profile and then buy those shares. Either way, you’ll want to check out the prospectus of the company before making a decision.

    How Do Companies Sell Pre-IPO Stock?

    Most pre-IPO companies sell stock by offering shares to angel investors and venture capital firms, known as “friends and family.” This type of sale is called a placement. A placement occurs when an investor purchases a block of shares in exchange for cash or securities. An example of this might be a wealthy individual purchasing 10 million shares of a company for $1 each. In return, he receives a promissory note worth $10 million. He pays the full amount upfront, and the company sends him his shares later. This process is called a placement because the investor places a deposit on the shares. After the company goes public, the investor sells the shares and gets paid based on the price per share. The company makes money whether the shares are priced well above or below the IPO price.

    The second method of selling shares is called an underwriting. Underwriters purchase shares from the company at a discounted price. They do this before the IPO, and they usually pay less than the market value. This way, they help the company raise funds without having to offer shares at the same price as everyone else. When the company goes public, these shares trade at a lower price because there aren’t enough buyers willing to bid up the price.

    Finally, some companies issue stock options to key executives. Executives receive shares as part of their compensation package. If the option is exercised, the executive must buy the shares at the strike price. However, the executive doesn’t actually own the shares until the IPO date. If the shares don’t perform well, the executive loses money. On the other hand, if the shares appreciate, the executive profits.

    Three steps to buying an IPO stock

    Step One: Open a brokerage account

    Step Two: Find out whether your broker offers IPOs

    Step Three: Invest in an IPO

    1. Prove eligibility

    TD Ameritrade will permit investors to buy shares in initial public offerings (IPOs) if they have at least $250K in assets with the firm, or have traded stocks with Ameritrade at 30 times in the past year. In this way, AmeriTrade is limiting IPO access to “better customers.”

    Fidelity’s requirements are similar: $100K in your account or 36 transactions in the past year. However, Fidelity limits participation to clients with $500K and those who have placed 72 trades in the previous twelve months.

    Schwab’s requirements are easier: $100K in assets or 36 trades in the past 12 months, or $200K in assets and 36 trades in the past 24 months.

    2. Request shares

    Assuming you meet the requirements for participation in an initial public offering (IPO), your next step will be requesting a certain number of shares. This is called the “requested allocation.” If you don’t receive the requested allocation, you’ll likely be offered a pro rata allocation, meaning you’ll receive some percentage of what you asked for.

    If you do receive the full amount of shares you ask for, you’ll have to decide whether to sell those shares immediately or hold onto them for future use.

    3. Place your order

    On the evening of the IPO, your broker will call you and tell you whether he/she thinks you are ready to purchase shares. If you agree, the broker will give you a deadline to place your offer. After you place the order, you will receive a confirmation email stating how many shares you bought and at what price. Your broker will also let you know if there are any restrictions on where you can trade, such as whether you must trade through a brokerage firm.

    If you don’t want to buy any shares, just say no. There is no obligation to buy anything.

    3 Ways You Can Buy Pre-IPO Stock

    If you’re looking to invest in early stage companies, there are many options out there for you. Some investors prefer to purchase stock directly from the company itself while others choose to go through a broker or exchange. But there are still some things you should keep in mind before jumping into the fray.

    The first thing you’ll want to do is determine what type of investing vehicle you’d like to use. Do you want to buy individual shares of stock or do you want to make an investment in a mutual fund? There are pros and cons to both approaches. For example, buying individual shares gives you full control over your portfolio, but it can also mean paying a lot more money up front. On the other hand, mutual funds offer diversification and lower fees, but you won’t always have complete control over your investments.

    Once you’ve chosen an approach, you’ll need to decide whether to look for public companies or private ones. Public companies trade publicly on exchanges and are subject to greater regulatory scrutiny than privately held firms. However, public companies tend to have better visibility into their financial health and are easier to research than privately held companies.

    Finally, once you’ve determined where you stand financially, you’ll need to figure out how much capital you want to commit to your portfolio. This depends on several factors including your risk tolerance, your personal finances, and your goals. For instance, if you plan to retire within five years, you might consider putting away $10,000 per month. If you’re planning to start a family soon, you might want to save even more.

    Use a Specialized Broker

    Brokers and financial advisors often participate in pre-IPO stock trading. Some even specialize in pre-IPO deals. You can find out what they offer by asking your current broker or using a broker that specializes in such transactions. Here are some brokers to consider.

    Forge Global recently merged with Shares Post to form a major pre-IPo marketplace. Forge offers both traditional brokerage services and specialized pre-IPO solutions. Its clients include companies like Facebook, Amazon, Twitter, Lyft, Pinterest, Square, Airbnb, Uber, and many others.

    Buy Pre-IPO Stocks Directly From Companies

    If you want to jump into the world of investing in startups, it helps to start small. You don’t necessarily need to become a venture capital firm or angel investor. Instead, you can simply find a few promising startups and purchase shares directly from them. This option requires less risk, since you won’t lose money if the startup fails.

    You can buy pre-IPOs directly from startups. Some companies offer this service, while others allow investors to do the same thing. In either case, here are three things you need to keep in mind:

    1. Know what you’re getting into

    2. Be ready for high transaction costs

    3. Keep your eyes open for fraud

    Buy Pre-IPO Stocks Indirectly

    Buying publically traded pre-IPO companies can be complicated. Here are three options for investors looking for indirect exposure to the pre-public offering market.

    1. Investing Through Venture Capital Firms

    The most common way to invest in pre-IPO startups is through publicly traded venture capital firms. They often take large stakes in early-stage companies and help guide them towards success. For example, Apollo invested $500 million into Uber and Blackstone invested $1 billion into Lyft.

    2. Investing Through PE Exchanges

    Another option is to buy shares in privately owned pre-IPO companies through exchanges. A number of exchange-traded funds offer exposure to private equity. One example is Invesco Global Listed Privately Held Companies ETF(NYSEARCA), which tracks the iShares S&P/ASX 200 Index Fund’s performance across a basket of Australian listed companies. Another example is Morgan Creek-Exos SPRA Originated ETF(NYSEARB). This fund invests in a portfolio of global private equity holdings that trade on Euronext Amsterdam.

    3. Investing Through Direct Ownership

    Finally, another option is to buy individual shares of pre-IPO companies. Many pre-IPO companies allow shareholders to sell their shares at fair value once the IPO is completed. Some even give shareholders access to information about the company’s operations prior to the IPO.

    How to Buy Pre-IPO Stock on Secondary Markets

    You can buy pre-IPo stock through platforms that allow you to sell private shares online – such as AngelList, EquityZen, and ForgeGlobal. They are called secondary markets because they operate outside of public companies’ initial public offerings (IPOs). If you’re interested in buying into a startup, here’s how it works.

    AngelList Venture

    AngelList is a leading startup investment platform. You can find startups looking for funding, investors looking to fund startups, and entrepreneurs looking to raise money. If you’re looking to invest in startups, you’ll want to check out AngelList.

    However, you can’t buy shares of pre-IPO stocks directly from the company. Instead, you invest in VC funds and angel investors that support startups. In fact, according to Crunchbase, there are over 2,500 active VC funds and over 9,000 angels invested in startups across the world.

    Although, AngelList isn’t accessible to everyone. To qualify for access, you must meet certain requirements including having a net worth of at lease $1 million, excluding your primary residence, or an annual income exceeding $200,000 ($400,000 if married). The SEC defines “accredited investor” as someone who meets those criteria.

    EquityZen

    Stockholders of privately held companies can now sell their shares on Equity Zen’s marketplace. This secondary market serves over 300 companies with over 250,000 shareholders. Users can choose from a variety options, including popular companies such as Stripe, InstacART and SpaceX. In addition, EquityZen offers managed pre-IPO fund portfolios that diversify investors’ portfolios in pre-IPO stocks. However, you must be accredited investor to purchase private equity shares. The minimum investment is usually around $10,000, though some investments require larger sums.

    ForgeGlobal

    Similar to EquityZen, Forge Global allows companies to buy and sell their pre-IPOs shares directly to investors. Companies can also sell their pre-IPo shares to investors via the ForgeGlobal exchange. The site has been around since 2017 and now serves over 400 companies with over 380K investors.

    The site charges a $3,500 annual subscription fee plus a one-time $1,500 processing fee. This makes it expensive compared to similar sites. For example, Sharespost charges $2,900 annually plus a $100 transaction fee.

    However, ForgeGlobal does offer discounts for larger transactions. For example, the site offers 50% off the regular price for companies with less than $10M in revenue.

    In addition, some private companies on ForgeGlobal are OpenSea, ByteDance, Discord, and Databricks. These companies are listed under the “Private” category.

    FAQs

    Where Can You Purchase IPO Stock?

    Investors can purchase an IPO stock via some online brokerage firms that offer the service. These brokers include SharesPost, Direct Edge, and Crowdcube.

    Momentum investors often purchase IPO stocks hoping for quick, initial market momentum-driven gains at the start of trading. But most IPOs are risky investments, so many conservative investors are usually less inclined to participate. For example, shares of Facebook went public in 2012, but it took nearly four months for the price per share to reach $45, according to Yahoo Finance.

    How Do You Find Upcoming IPOs?

    The best way to find upcoming IPOs is to subscribe to one of the many feeds that provide you with news and analysis of IPOs. They include Seeking Alpha, IPO News, IPO Analysis, and others. These feeds give you a list of upcoming IPOs with some basic background information.

    What Time Do IPOs Start Trading?

    IPO stands for initial public offering, and it refers to the process where a small number of companies go public and list their stocks on the Nasdaq exchange or another major stock exchange. These IPOs are usually large, well-known businesses that want to raise capital for growth or acquisitions. IPOs are typically listed on the New York Stock Exchange, American Stock Exchange, NASDAQ, NYSE Arca or OTC markets. In 2017, there were 521 IPOs worth $1 billion or more.

    The IPO starts when a company files paperwork with the Securities and Exchange Commission (SEC), which allows people to invest in the company. This filing is called an “effective date.” Once the effective date occurs, anyone can buy the stock, even though it hasn’t been traded publicly.

    After the IPO is complete, the stock begins trading on the open market. At that point, investors can buy and sell shares of the new stock. There are several ways to do this, including over-the-counter (OTC) trades. An OTC trade happens when someone buys or sells shares privately without getting approval from the SEC. If done properly, the buyer and seller agree on how much each person will pay for the shares.

    In some cases, however, the SEC requires that certain types of transactions happen on the regulated exchanges. For example, if a company wants to issue preferred shares, the company must file its IPO papers with the SEC and let investors know about the preferred shares. Then, the company must wait for the SEC to approve the shares before they become part of the IPO. This is because the preferred shares aren’t actually sold in the IPO; rather, they’re given to existing shareholders.

    Can You Buy Pre-IPO Stock?

    Pre-IPO stock is sold as a private placement before the initial public offering (IPO). This type of stock is often referred to as a “pre-IPO,” although some companies prefer to call it a “private equity.”

    The most common way to purchase a pre-IPO stock is through a broker. Some brokers offer access to private-placement databases where you can find a list of pre-IPO stocks.

    Private-equity firms, investment banks, hedge funds and other institutions typically acquire pre-IPO stocks because the risk associated with investing in small cap technology companies is high. These types of companies rarely make money, and many fail within three years. However, if a company does succeed, it could go public later and potentially increase in value.

    High-net-worth individuals like celebrities, athletes and entertainers may invest in pre-IPO stocks, as well. Many wealthy people have millions of dollars in liquid financial assets, meaning they can easily sell their holdings if they want to.

    One caveat about buying pre-IPO stock: There is no guarantee that the company will ever go public. If the company fails to meet its revenue targets, it might never be listed, even though it is privately owned.

    Are IPOs A Good Investment?

    The biggest risk investors face when buying into a newly listed stock is that the stock could drop after hitting its initial public offering price. In fact, one study found that over half of IPOs fall within three months of their debut.

    That doesn’t mean you shouldn’t invest in IPOs — there are many reasons why an IPO makes sense. But you need to understand what lies ahead for the company and take those risks seriously.

    What are the Risks Associated with Pre-IPO Funds?

    Pre-IPO funds are typically used to invest in companies that are about to go public. They provide investors with exposure to the IPO market while allowing them to avoid many of the pitfalls associated with traditional IPOs. However, there are several risks that come along with investing in pre-IPO funds.

    The biggest risk is that you could lose money. If the fund does poorly, you could end up losing money. You don’t want to lose money because you invested in a fund that did badly. Another risk is that you could miss out on big gains. If the fund performs well, you might miss out on those gains.

    You also run the risk of being exposed to fraud. There have been cases where people have been scammed into buying shares in a fund that never went public. In some cases, the scammer even convinced someone else to buy the shares.

    Finally, there is the issue of taxes. When you sell shares in a pre-IPO fund, you will owe capital gains tax. This can be complicated, especially if you hold onto the shares for longer than one year.

    In Summary

    Investing in pre-IPO stock isn’t for everyone. It’s not easy to get involved in these kinds of investments, but if you’re willing to do your research and put in the time, you’ll likely reap rewards down the road.

    Dylan Morwell

    Since becoming an Accredited Investor himself, Dylan Morwell has had a fascination with accredited investment and loves to help others achieve the same success.

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