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While 2022 wasn’t a banner year for IPOs, experts predict that the number and value of IPOs are expected to increase in 2023 and beyond.

When you hear that a company is officially going public, you may be tempted to jump on board. After all, investing in an IPO can help you get in on the ground floor, so to speak. This article will teach you how to invest in IPO stocks so you can take advantage of new opportunities.

What Is an IPO?

When a private company makes the transition to a publicly traded one, they go through a process known as an “initial public offering,” or IPO. By doing so, private companies receive money from investors that can fuel their growth and increase brand awareness.

For the companies, making an IPO involves generating and filing various reporting documents, paying audit fees, and forming accounting oversight committees. When it’s all said and done, investors will find these companies listed on major U.S. stock exchanges for the first time.

Learning how to invest in IPOs can help you seize these new opportunities as they become available.

Benefits of IPO Stocks

Why might you consider investing in an IPO? Here are some of the greatest benefits of IPO investing.

Early Access

For many investors, IPO stocks offer the chance to get in on the ground floor and invest in a company before it makes it big.

A common example is Amazon stock. In 1997, the company debuted at $18 per share. Today, it’s trading at $127. That’s a sevenfold increase in less than 30 years, to say nothing of the times the company’s stock has peaked at much higher levels. IPO investing gives you the chance to be an early investor and reap the rewards.

Price Transparency

During an initial public offering, there’s total transparency about the company’s stock price. For that matter, there will be much discussion on blogs and investment platforms about the company’s past performance and future potential, giving investors access to a wide array of detailed financial information.

Potential for Growth

Investing in an IPO can actually fuel the company’s success. Companies often rely on IPOs to bring in additional capital to fuel new expansion projects or revenue streams. By investing in an IPO, you can contribute to the company’s growth and reap the rewards as the stock price rises.

Risks of IPO Stocks

As beneficial as it can be, IPO investing isn’t entirely without potential downsides, which include the following.

The Stock Price Isn’t Guaranteed

There’s zero guarantee that a company’s stock price will soar in the weeks or months following the IPO. While that’s true of any stock, other established companies have a longer track record that investors can research before making a decision. Even household names like Twitter fell below the IPO price after their debut.

IPOs May Not Reflect a Strong Business Plan

Companies might use an IPO to gain working capital to fuel expansion projects, but that doesn’t necessarily mean they have a specific business plan in place. Always research the company to learn what initiatives (if any) they plan to undertake once they receive additional funding from investors.

The Eligibility Requirements May Be Strict

IPO stocks frequently come with eligibility requirements, which can vary between companies and brokers. Casual investors may struggle to meet the requirements needed to purchase IPO shares, which means IPO stocks tend to privilege institutional investors.

How to Invest in IPO Stocks

The following guide will tell you how to buy IPO stock in USA-based markets.

It’s important to note that just because a company has officially gone public doesn’t mean that IPO stock is as readily available as shares of other publicly traded companies — many times, shares of these companies will be sold to institutional investors before being widely available. 

Even so, you may be able to purchase shares of IPO stocks by taking the following steps.

Research Before Investing

You should never go forward with any investment without careful research and planning, and IPOs are no exception.

Make an effort to learn as much about the company’s past performance and future potential as possible. This means looking at quantitative data like their revenue, as well as qualitative data that includes their leadership structure or position within their industry.

Keep in mind that the company’s past performance isn’t always a clear indicator of future success. IPOs are designed to increase the company’s capital so that they have a greater chance of flourishing.

Find the Right Broker

In order to make a purchase, you’ll need a broker that works with IPO stocks. The right broker may even be able to show you how to purchase IPO stock and go over any requirements that may be involved.

Many online platforms offer IPO investing options, meaning investors aren’t restricted to in-person firms. Just take some time to compare the rates, terms, and fees of different brokerage accounts to make sure you’re using a platform that’s right for you.

Meet the Eligibility Requirements for the IPO

Before you can purchase shares of an IPO, you’ll have to meet the eligibility requirements. The exact requirements vary between IPOs and the brokers that sell them, but common criteria include:

  • Income level
  • Investment goals
  • Other securities in your portfolio
  • Minimum investment

Some brokers may also attach account requirements regarding the number of securities you hold or the number of trades you make each year.

Request Shares

Assuming you meet the eligibility requirements, you can request shares from your broker. Again, there’s no guarantee that your request will be fulfilled — you may fail to meet your broker’s eligibility requirements or be edged out by an institutional investor.

There’s also the matter of timing. In some cases, brokers may have a limited number of shares available. Not only might you be beaten by institutional investors, but if you delay, the broker could simply sell out before you submit your request.

Consider a Mutual Fund

An IPO stock doesn’t have to be purchased individually. Some mutual funds contain IPO stocks. Like any fund, these investment vehicles provide built-in diversification and can lower the risks of IPO investing.

Of course, the relative scarcity of IPO stocks also means investors won’t have many IPO mutual funds to choose from. You might consider this alternative when selecting a broker to find a platform that gives you access to IPO mutual funds.

Place Your Order

Once your broker agrees to sell you the IPO shares, you can place what’s known as a conditional offer to buy. This means that once the IPO is priced, you’ll be able to review the price and confirm or change your order.

Placing a conditional offer to buy ensures that your order will go through at the desired price. You won’t be able to buy more shares than you requested or pay a higher price than what’s specified in your order.

Monitor Your Investment

Finally, and perhaps most importantly, make plans to monitor the performance of your new investment. An IPO carries risk for investors, so keep a close eye on the share price to determine whether the stock is worth keeping.

Having a well-balanced portfolio can offset the risks of an IPO, which means investors may feel less anxious about the day-to-day performance of their new stock pick. That said, it’s important to make the right call to avoid dramatic losses if the stock consistently underperforms.

Research You Can Trust

Now that you know how to invest in IPO stocks, you need an investment platform that can assist you with research, stock tips, and advanced tools and tutorials. You’ll find all that and more with Gorilla Trades.

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