The underwriters in consultation with the company decide on the basic terms and structure of the offering well before trading starts, including the percentage of shares going to institutions and individual investors respectively. Most underwriters target institutional or wealthy investors in IPO distributions. Underwriters believe that institutional and wealthy investors are better able to buy large blocks of IPO shares, assume the financial risk and hold the investment for the long term. So retail investors typically don’t have a vehicle to buy into newly listed companies until those shares begin trading on an exchange, which is often after the share price has surged.
However, some brokerage firms may get an allocation of shares by partnering with investment banks, so their customers may have a chance to invest in an IPO. When companies issue IPOs, they notify brokerage firms, who, in turn, inform investors. Not only that, an investor must register with a brokerage firm and meet the broker’s eligibility requirements to partake in an IPO. It's important to note that each brokerage firm has its own criteria for determining who receives an allocation of shares. Typically, customers with significant, long-term relationships with their brokerage firm will receive higher priority than those with smaller or new relationships.
Is it a good idea to buy IPO stocks?
IPOs tend to receive a lot of media attention, so some of which are deliberately over-hyped by the company going public and investment banks. Generally speaking, the majority of IPOs are known for gaining in short-term trading as they become introduced to the public, and they tend to produce volatile price movements on the day of the IPO and shortly thereafter. This can occasionally bring large gains, although it can also produce large losses. Ultimately, investors should judge each IPO according to the prospectus of the company going public as well as their financial circumstances and risk tolerance.
Summary:
- Retail investors typically don’t have a vehicle to buy into newly listed companies until those shares begin trading on an exchange, but some brokerage firms may get an allocation of shares, so if an investor can meet the broker’s eligibility requirements, they are able to partake in an IPO.
- Buying IPO stock can be appealing, but IPOs tend to garner huge attention, which may be overly hyped by the company going public and creating massive price fluctuations.
- Investors should judge each IPO according to the prospectus of the company going public as well as their financial circumstances and risk tolerance before investing in an IPO.
