How to Buy Stock at an Initial Public Offering (IPO)

Buying stock at an initial public offering involves more than having an account with a discount brokerage firm. To get the IPO price, an individual investor generally has to have more than a few thousand dollars and a trading account.

Most high profile IPOs are reserved for large players, hedge fund managers and other large clients of investment banking firms that underwrite the deal. Getting in on an IPO generally requires that you have an account open with one of these firms and that you meet the requirements they ask for in order for you to participate in the IPO.

Small investors do not qualify because they are not the target market for IPOs.
Investment bankers want to offer the shares to companies, hedge funds and high net worth individuals that they make large commissions from.

The majority of retail investors have no choice but to try to buy the newly issued stock in the secondary market once the stock starts trading on a stock exchange. This means that smaller investors often wind up paying a high premium for the newly issued stock.

Opening an Account with an Investment Banker

If you are serious about participating in an IPO, then you should be prepared to open an account with an investment banker such as J.P. Morgan, Morgan Stanley or Goldman Sachs for example. These investment bankers handle most of the underwriting of IPO shares in the United States.

The first consideration, of course, involves the minimum amount of money that the investment banker requires in order for you to open an account. Typically, these individual investment banking accounts have a minimum deposit of $100,000 to $500,000 in order to participate in an IPO.

While this may sound a bit much to most people, just opening an account does not automatically qualify you to participate in any given IPO at most investment banks. The first requirement of most investment banks, after you have made your deposit and opened your account, is that you be on a list of clients that receive prospectuses for upcoming IPOs.

Investment bankers generally have other requirements in order to participate in IPOs. These requirements can include a certain amount of trading experience, a minimum amount of time that the account has been open or a certain amount of account activity in order to participate in an IPO.

How a Small Investor can Participate

Basically, the only way for a small investor to get in on an IPO, is to buy the stock on the open market after the shares start trading on the stock exchange. If the IPO is a hot issue, chances are the stock will trade with a high level of volatility right after it opens.

If the stock opens considerably higher than the IPO price, a good chance exists that the market will react and the underwriters and other investors might sell shares to realize profits on the difference, bringing the market down in the process. This could be a buying opportunity. Regardless of the price, if a person is looking to make a serious investment and hold the stock for the long-term, buying in the secondary market right after the IPO would be the right time.



By InvestorGuide Staff

Copyrighted 2020. Content published with author's permission.

Posted in ...