Bob HatchAn Initial Public Offering, commonly called IPO refers to when a private company, usually a start-up company, goes public by offering its shares on a stock exchange.
When a private company offers its shares for the first time to the public, it creates an opportunity for investors to realize huge returns. It’s no wonder investors get so excited about getting in on an IPO.
In this article, you will learn how an IPO stock works and how to buy it.
How Does an IPO Stock Work?
Typically, all businesses begin as privately owned, with their start-up capital probably gotten from the founders, loan companies, or venture capital investors who bought stakes in the firms.
At one point, a company might choose to raise more capital by offering shares to the public for sale. One of the ways they do this is through IPOs.
A broker-dealer and an investment bank or a group of broker-dealers and a group of investment banks usually overwrites the IPO. They buy the shares from the company and then sell them to public investors at the IPO.
How to Buy an IPO Stock
- Have a Brokerage Account
The first step to buying an IPO stock is opening an account with a participating broker. This of course does not guarantee that you will be able to get your hands on an IPO. The reason is the buying competition from other clients who are most likely more significant. In situations like this, it’s easier for the bigger client to get their hands on the shares.
- Check If You Meet the Eligibility Requirements
Eligibility requirements may vary depending on the broker. Requirements might include a specific account balance or amount in assets, or a reputable trading history. You might have to meet the SEC’s accredited investor criteria.
- Request IPO Shares
Once you have met the eligibility requirements, the next step is to request shares from your broker. You might have to fill out a form and inform the broker of your interest in the stock and how many shares you’re interested in buying.
- Place the Order for Your IPO Shares
Your broker will inform you as soon as the IPO is priced and you will have to place your order using your broker’s buying system. You can confirm or change your order before the deadline reaches.
It is after placing your order you will be able to find out whether or not you were able to get any shares. Your broker will let you know how many shares you bought.
But know that brokers only get a limited number of shares, so, you might get a smaller number of shares than you offered to purchase or none at all.
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