IPO 101: A Beginner’s Guide to Understanding Initial Public Offerings and How Retail Investors Can Participate

Initial Public Offerings, commonly known as IPOs, have become a popular way for companies to raise capital and go public. An IPO is a process where a private company offers shares of its stock to the public for the first time, making it available for purchase on a public stock exchange. It’s a major milestone for a company, and often an exciting opportunity for investors looking to get in on the ground floor of a potentially successful venture. However, navigating the world of IPOs can be intimidating for beginners, especially for retail investors who may not have the same access or resources as institutional investors. In this article, we’ll provide a comprehensive guide to IPOs and share how retail investors can participate in this exciting investment opportunity.

The Process of an IPO

The process of an Initial Public Offering (IPO) can take several months, involving multiple parties such as investment banks, underwriters, and regulators. Here are the typical steps involved in an IPO:

1. Choosing an Investment Bank: The company going public selects an investment bank to serve as the lead underwriter for the IPO. The investment bank helps the company prepare for the IPO, including conducting due diligence, determining the offering price, and creating a prospectus.
2. Due Diligence: The investment bank conducts a thorough review of the company’s financials, operations, and management to ensure that all material information is disclosed to potential investors.
3. Filing with Regulators: The company files a registration statement with the Securities and Exchange Commission (SEC) that discloses all relevant information about the company, its operations, and its financials. The SEC reviews the registration statement and provides feedback, which may require revisions and amendments.
4. Roadshow: The company and its underwriters conduct a series of meetings with potential investors to generate interest in the IPO. These meetings are called a “roadshow” and usually involve presentations by the company’s management team and underwriters.
5. Pricing: The investment bank and the company agree on an offering price for the shares. This price is typically based on the company’s financials, market conditions, and investor demand.
6. Allocation: The investment bank and the company determine how many shares will be sold and how they will be allocated to investors.
7. Trading: Once the IPO is complete, the shares begin trading on a public stock exchange.

IPOs can be a complex process, but they can also be a lucrative investment opportunity for those who participate. Retail investors can participate in IPOs through their brokerage accounts, but it’s important to do your due diligence and carefully consider the risks before investing.

Why Companies Go Public

There are several reasons why a company may decide to go public and offer shares of its stock to the public through an IPO. Here are some of the most common reasons:

1. Raise Capital: One of the primary reasons companies go public is to raise capital. By selling shares of its stock to the public, a company can raise funds that it can use to invest in its business, pay off debt, or finance expansion plans.
2. Increase Visibility: Going public can increase a company’s visibility and brand awareness, which can be beneficial for attracting customers and business partners. It can also help the company establish credibility in its industry and attract top talent.
3. Provide Liquidity for Shareholders: Going public can provide liquidity for the company’s existing shareholders. By offering shares of stock to the public, shareholders can sell their shares on a public exchange and potentially realize a return on their investment.
4. Facilitate Acquisitions: Going public can make it easier for a company to acquire other businesses through the use of stock. By offering shares of its stock as consideration for an acquisition, a company can potentially reduce the amount of cash it needs to spend on the acquisition.
5. Reward Employees: Going public can also provide a way for a company to reward its employees through stock-based compensation plans. This can help attract and retain top talent by providing employees with a stake in the company’s success.

While going public can offer many benefits, it also comes with additional regulatory and reporting requirements, increased scrutiny from investors and analysts, and potential dilution of ownership for existing shareholders. Companies should carefully consider the pros and cons before deciding to go public.

Risks Associated with IPOs

While Initial Public Offerings (IPOs) can present exciting investment opportunities, there are also risks associated with investing in newly public companies. Here are some of the most common risks to consider before investing in an IPO:

1. Lack of Track Record: Newly public companies often have a limited operating history, making it difficult to evaluate their financial performance and prospects for future growth.
2. Volatility: IPOs can be highly volatile, with share prices fluctuating significantly in the first few months of trading. This can create significant risks for investors who are not prepared for this level of volatility.
3. Insider Selling: Following an IPO, insiders (such as founders, executives, and early investors) may sell their shares, putting downward pressure on the stock price.
4. Underperformance: Despite the hype surrounding many IPOs, there is no guarantee that a newly public company will perform well in the long term. In fact, some studies have shown that IPOs underperform the broader market over the long term.
5. Lockup Periods: Many IPOs include lockup periods, during which insiders are prohibited from selling their shares. When the lockup period expires, there may be a flood of selling pressure that can drive down the stock price.
6. Mispricing: IPOs can be mispriced, with the offering price being higher or lower than the stock’s true value. If the offering price is too high, investors may not see significant returns, while a low offering price could indicate that the company is undervalued.

How Retail Investors Can Participate

Retail investors can participate in an IPO through their brokerage accounts. However, it’s important to note that participating in an IPO as a retail investor can be more challenging than investing in publicly traded stocks.

Here are the process that retail investors can participate in an IPO:

1. Open an Account: To participate in an IPO through brokerage, you will first need to open an account on the platform. This can be done by downloading their app or following the account opening instructions from website.
2. Check for Upcoming IPOs: Once you have opened your broker account, you can check for upcoming IPOs by navigating to the “IPO Center” section of the app. This will provide a list of upcoming IPOs and information about the offering price and expected IPO date.
3. Express Interest: To participate in an IPO, you will need to express interest in the offering. This can be done by clicking on the IPO listing and indicating the number of shares you would like to purchase.
4. Wait for Allocation: After expressing interest in an IPO, you will need to wait for the allocation process to take place. Shares are typically allocated on a first-come, first-served basis, so it’s important to express interest as early as possible.
5. Purchase Shares: If you are allocated shares in the IPO, you will need to purchase them through the app. The app will provide instructions for completing the purchase, which will typically involve transferring funds from your brokerage account.

Here are several brokers that retail investors can participate in an IPO:

1. moomoo: Moomoo is an online brokerage platform that allows retail investors to participate in IPOs. The feature of moomoo is that anyone who participates in the IPO can win shares, the number of shares are allocated to all subscribers in proportion to their subscription quantity.
2. Webull: Webull is a commission-free, online brokerage platform that allows investors to trade stocks, options, and ETFs on U.S. exchanges. It was founded in 2017 and has since gained popularity among retail investors due to its low fees, intuitive platform, and range of advanced tools and features.
3. TD Ameritrade: TD Ameritrade is a leading online brokerage platform that offers a range of financial services, including trading stocks, options, futures, and forex. With TD Ameritrade IPO program, eligible customers can place conditional offers to purchase shares of upcoming IPOs at the IPO price, which is typically lower than the price the stock will start trading at on the open market. This gives TD Ameritrade customers the opportunity to potentially profit from the stock’s price increase after it starts trading on the open market.
4. Fidelity: The Fidelity IPO program is a service offered by Fidelity Investments that provides eligible Fidelity customers with the opportunity to participate in initial public offerings (IPOs) of publicly-traded companies. With the Fidelity IPO program, customers who meet eligibility requirements ($500,000 or more asset host in Fidelity) can place conditional offers to purchase shares of upcoming IPOs at the IPO price, which is typically lower than the price the stock will start trading at on the open market. This gives Fidelity customers the opportunity to potentially profit from the stock’s price increase after it starts trading on the open market.
5. TradeUp: TradeUP brokerage platform allows users to participate in initial public offerings (IPOs) of publicly-traded companies. With TradeUP IPO, users can place orders for shares of upcoming IPOs at the IPO price, which is typically lower than the price the stock will start trading at on the open market. This gives TradeUP users the opportunity to potentially profit from the stock’s price increase after it starts trading on the open market.TradeUP IPO also offers a streamlined application process for IPO participation, making it easier for users to participate in IPOs. Additionally, TradeUP offers commission-free trading for IPOs, making it an attractive option for investors looking to participate in IPOs without incurring high trading fees.

Conclusion

In conclusion, initial public offerings (IPOs) are a popular investment opportunity for traders and investors looking to potentially profit from the first-time sale of stock in a company to the public. Brokerage platforms such as TradeUP, Fidelity, and TD Ameritrade offer IPO programs that provide eligible customers with the opportunity to participate in upcoming IPOs at the IPO price, potentially allowing them to profit from the stock’s price increase after it starts trading on the open market. With streamlined application processes and commission-free trading, these IPO programs make it easier and more affordable for investors to participate in IPOs. Whether you’re a new or experienced investor, IPOs can be a valuable addition to your investment portfolio, and the IPO programs offered by these brokerage platforms can help you take advantage of this exciting investment opportunity.