InvestHL Archives

Sep

2025

Exit Strategy for Investors: Definition and Examples

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is an Exit Strategy?
How Exit Strategies Work
When Should an Exit Strategy Be Used?
Exit Strategy Examples
5 Types of Exit Strategies
Why Exit Strategies Are Important
How to Develop an Exit Strategy Plan
FAQ

An exit strategy is a plan to liquidate a financial investment or dispose of a business in order to maximize potential gains and minimize losses. Thus, an exit strategy for stocks, options, and other assets can be useful, whether prices have moved in the desired direction or not.

An exit strategy assumes that certain criteria, laid out in advance, have been met — and thus exiting the position by selling one’s stake will help preserve capital and/or minimize the risk of loss.

Key Points

• Just as investors have a strategy for investing in stocks, it’s wise to have an exit strategy for stocks when the conditions are right to sell.

• An exit strategy presumes certain conditions have been met in order to liquidate a position.

• Investors, venture capitalists, and others may have an exit strategy for selling a stock, a business, or disposing of other assets.

• An exit strategy for stocks may help an investor cut loose an underperforming stock.

• By and large, an exit strategy is meant to preserve capital and minimize losses.

What Is an Exit Strategy?

Broadly speaking, an exit strategy refers to steps an individual takes in order to get out of a financial or business obligation, or even a personal one. For instance, an employee who’s interested in changing jobs may form an exit strategy for leaving their current employer and moving on to their next one.

What is an exit strategy in finance or business? It’s a plan crafted by business owners or investors that cover when they choose to liquidate their position in an investment. To liquidate means to convert securities or other assets to cash. Once this liquidation occurs, the individual or entity that executed the exit strategy no longer has a stake in the investment.

Creating an exit strategy prior to making an investment can be advantageous for managing and minimizing risk. It can also help with defining specific objectives for making an investment in the first place.

In other words, formulating your exit strategy beforehand, when investing in stocks, can give you clarity about what you hope to achieve.

Exit strategies often go overlooked, however, as investors, venture capitalists, and business owners may move ahead with an investment with no clear plan for leaving it.

How Exit Strategies Work

Investors use exit strategies to realize their profit or to mitigate potential losses from an investment or business. When creating an exit strategy, investors will typically define the conditions under which they’ll make their exit.

For instance, an exit strategy plan for investors may be contingent on achieving a certain level of returns when starting to invest in stocks, or reaching a maximum threshold of allowable losses. Once the contingency point is reached, the investor may choose to sell off their shares as dictated by their exit strategy.

A venture capital exit strategy, on the other hand, may have a predetermined time element. Venture capitalists invest money in startups and early stage companies. The exit point for a venture capitalist may be a startup’s IPO or initial public offering.

Again, all exit strategies revolve around a plan. The mechanism by which an individual or entity makes their exit can vary, but the end result is the same: to leave an investment or business when certain conditions are met.

Recommended: Stock Market Basics

When Should an Exit Strategy Be Used?

There are different scenarios when an exit strategy may come into play. For example, exit strategies can be useful in these types of situations:

• Creating a succession plan to transfer ownership of a profitable business to someone else.

• Shutting down a business and liquidating its assets.

• Withdrawing from a venture capital investment or angel investment.

• Selling stocks or other securities to minimize losses.

• Giving up control of a company or merging it with another company.

Generally speaking, an exit strategy makes sense for any situation where you need or want to have a plan for getting out, whether you’re investing online or through other channels.

Exit Strategy Examples

Here are some different exit strategy examples that explain how exit strategies can be useful to investors, business owners, and venture capitalists.

Exit Strategy for Investors

When creating an exit strategy for stocks and investing, including how to buy stocks, there are different metrics you can use to determine when to get out. For example, say you buy 100 shares of XYZ stock. You could plan your exit strategy based on:

• Earning target from the investment

• Avoiding a loss on the investment

• How long you want to stay invested

Say your goal is to earn a 10% return on the 100 shares you purchased. Once you reach that 10% threshold you may decide to exit while the market is up and sell your shares at a profit. Or, you may set your maximum loss threshold at 5%. If the stock dips and hits that 5% mark, you could sell to head off further losses.

You may also use time as your guide for making an exit strategy for stocks. For instance, if you’re 30 years old now and favor a buy-and-hold strategy, you may plan to make your exit five or 10 years down the line. On the other hand, if you’re interested in short-term gains, you may have a much smaller window in which to complete your exit strategy.

Exit strategies can work for more than just stock investments. For instance, you may have invested in crowdfunding investments, such as real estate crowdfunding or peer-to-peer lending. Both types of investments typically have a set holding period that you can build into your exit plan.

Recommended: 5 Investment Strategies for Beginners

Exit Strategy for Business Owners

An exit strategy for business owners can take different forms, depending on the nature of the business. For instance, if you run a family-owned business then your exit strategy plan might revolve around your eventual retirement. If you have a fixed retirement date in mind your exit plan could specify that you will transfer ownership of the business to your children or sell it to another person or company.

Another possibility for an exit strategy may involve selling off assets and closing the business altogether. This is something a business owner may consider if the business is not turning a profit, and it looks increasingly unlikely that it will. Liquidation can allow a business owner to repay their creditors and walk away from a failed business without having to file bankruptcy.

Exit Strategy for Startups

With startups and larger companies, exit strategies can be more complex. Examples of exit strategy plans may include:

• Launching an IPO to allow one or more founders to make an exit

• A merger or acquisition that allows for a transfer of ownership

• Selling the company

• Liquidating assets and shutting the company down

If a founder is ready to move on to their next project, they can use an IPO to leave the company intact while extricating themselves from it. And angel investors or venture capitalists who invested in the company early on also have an opportunity to sell their shares.

Startup exit strategies can also create possible opportunities for some investors. IPO investing allows investors to buy shares of companies when they go public.

The mechanics of using an IPO as an exit strategy can be complicated, however. There are IPO valuations and regulatory requirements to consider.

It’s important for startup founders to know how to value a business before taking it public to ensure that an IPO is successful. And early-stage investors may have to observe IPO lock-up period restrictions before they can sell their shares.

5 Types of Exit Strategies

There are different types of exit strategies depending on whether you’re an investor, a business owner, or a venture capitalist. Some common exit strategies include:

1. Selling Shares of Stock

Investors can use an exit strategy to set a specific goal with their investment (say, 12%), reach a certain level of profit, or determine a point at which they’ll minimize their loss if the investment loses value. Once they reach the target they’ve set, the investor can execute the exit strategy and sell their shares.

2. Mergers and Acquisitions

With this business exit strategy, another business, often a rival, buys out a business and the founder can exit and shareholders may profit. However, there are many regulatory factors to consider, such as antitrust laws.

3. Selling Assets and Closing a Business

If a business is failing, the owner may choose to liquidate all the assets, pay off debts as well as any shareholders, if possible, and then close down the business. A failing business might also declare bankruptcy, but that’s typically a last resort.

4. Transferring Ownership of a Business

This exit strategy may be used with a family-run business. The owner may formulate an exit plan that allows him to transfer the business to a relative or sell it at a particular time so that he or she can retire or do something else.

5. Launching an IPO

By going public with an IPO, the founder of a startup or other company can leave the company if they choose to, while leaving the business intact. As noted, using an IPO as an exit strategy can be quite complicated for business founders and investors because of regulatory requirements, IPO valuations, and lock-up period restrictions.

Why Exit Strategies Are Important

Exit strategies matter because they offer a measure of predictability in a business or investment setting. If you own a business, for example, having an exit strategy in place that allows you to retire on schedule means you’re not having to work longer than you planned or want to.

An exit strategy for investors can help with staying focused on an end goal, rather than following the crowd, succumbing to emotions, or attempting to time the market. For example, if you go into an investment knowing that your exit plan is designed to limit your losses to 5%, you’ll know ahead of time when you should sell.

Using an exit strategy can help prevent losses that could occur when staying in an investment in the hopes that it will eventually turn around. Exit strategies can also keep you from staying invested too long in an investment that’s doing well. The market moves in cycles and what goes up eventually comes down.

If you’re on a winning streak with a particular stock, you may be tempted to stay invested indefinitely. But having an exit strategy and a set end date for cashing out could help you avoid losses if volatility sends the stock’s price spiraling.

How to Develop an Exit Strategy Plan

Developing an exit strategy may look different, depending on whether it involves an investment or business situation. But the fundamentals are the same, in that it’s important to consider the specific conditions that must be met:

• What form an exit will take (i.e., liquidation, IPO, selling shares, etc.)

• Whether an exit is results-based or time-based (i.e., realizing a 10% return, reaching your target retirement date, etc.)

• Key risk factors that may influence outcomes

• Reasons and goals for pursuing an exit strategy

If you’re an individual investor, you may need to formulate an exit plan for each investment you own. For instance, how you exit from a stock investment may be different from how you sell off bonds. And if you’re taking on riskier investments, such as cryptocurrency, your exit strategy may need to account for the additional volatility involved.

For business owners and founders, exit strategy planning may be a group discussion that involves partners, members of the board, or other individuals who may have an interest in the sale, transfer, or IPO of a company. In either situation, developing an exit strategy is something that’s best done sooner, rather than later.

The Takeaway

Investing can help you build wealth for the long-term, and an exit strategy is an important part of the plan. It allows you to decide ahead of time how and when you’ll get out of an investment, and could help you lock in returns or minimize losses.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

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FAQ

What are different exit strategies?

Examples of some different exit strategies include selling shares of a stock once an investor realizes a certain return or profit, transferring ownership of a family business so an owner can retire, or selling all the assets and closing down a failing business.

What are the most common exit strategies?

The most common exit strategies depend on whether you’re an investor, the owner of an established business, or the founder of a startup. For investors, a common exit strategy is to sell shares of stock once they reach a certain high or low. For owners of an established business, a common exit strategy is mergers and acquisitions, because doing so is often favorable to shareholders. For founders of startups, a common exit strategy is an initial public offering (IPO).

What is the simplest exit strategy?

For an investor, the simplest exit strategy is to sell shares of stock once they reach a certain profit or target level of return. At that point they can sell their shares for more money than they paid for them.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/Christian Guiton

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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SOIN-Q325-099

Sep

2025

What Is a Direct Stock Purchase Plan (DSPP)?

By Matthew Zeitlin | Growing Wealth, invest, Investing | Comments Off

Table of Contents

Direct Stock Purchase Plans (DSPP), Explained
Pros and Cons of a DSPP
How To Invest in a DSPP
What to Consider Before Buying DSPPs
FAQ

A direct stock purchase plan (DSPP) is a plan that allows investors to purchase stock in a company without a broker and get it directly from the company instead. With DSSPs, fees, if any, are often low.

Meanwhile, discounts to the share prices may be available for larger purchases. With shares purchased through a DSPP, investors have the same profit and loss opportunities, access to dividends, as well as stockholder voting rights. However, direct stock purchase plans may not be right for every investor.

Key Points

• A Direct Stock Purchase Plan (DSPP) allows company stock to be purchased directly, often at a discount, without a broker.

• DSPPs may offer a low initial investment, dividend reinvestment, and shareholder rights, making them accessible for long-term investors.

• Potential drawbacks include limited diversification, investment caps, and fees when selling shares.

• Commission-free trading in brokerages has reduced the cost-saving appeal of DSPPs.

• Companies such as Walmart, Coca-Cola, Starbucks, The Home Depot, and Best Buy offer or have offered DSPPs to investors.

Direct Stock Purchase Plans (DSPP), Explained

What is a direct stock purchase plan? Typically, many investors use a broker to buy shares of stock. But you can sometimes purchase stocks directly from companies, no broker required. This is what it means to participate in a direct stock purchase plan.

Many blue-chip stocks tend to offer DSPPs. For example, let’s say Company X offers a plan that allows investors to buy $500 or more worth of company stock directly from it, up to $250,000 a year, with some service and transaction fees.

With a DSPP, investors directly purchase shares, sometimes at a small discount. Discounts can range from 1% to 10% to encourage investors to buy more shares. However, because many brokerage accounts now waive fees and commissions entirely for many investors, the savings difference is smaller than it used to be.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Pros and Cons of a DSPP

Direct stock purchase plans have benefits and drawbacks.

Pros

Pros of DSPPs include:

• No broker needed. Investors can purchase shares of stock directly from the company.

• Very little money is required to get started, and the process is typically simple to do, making them good for long-term investing.

• Some DSPP programs offer dividend reinvestment plans.

Cons

Cons of DSPPs include:

• An investor may not achieve portfolio diversification because not all stocks offer DSPPs.

• Companies may put maximum limits on how much an individual investor can purchase.

• When selling DSPP stocks, multiple types of fees can sometimes be charged.

How To Invest in a DSPP

Armed with information about how to buy directly from companies, investors may want to explore what specific opportunities exist. Perhaps they already have a publicly traded company in mind. In that case, they can go to that company’s investor relations website to see if the company offers this type of investment opportunity.

They can also search on the Internet to see which direct stock purchase plans are available.

More specifically, if someone wants to buy stocks in this way, they typically open an account and make deposits into it. Usually, these deposits are automatically made monthly through an ACH funds transfer from the investor’s bank account. In some cases you can write checks as well.

Then, that dollar amount is applied toward purchasing shares in that company’s stock, which can include fractional shares. For example, let’s say that one share of a company’s stock currently costs $20. If an investor sets up an ACH withdrawal of $50 monthly, then, each month they have purchased 2.5 shares of that company’s stock.

One of the benefits of investing through a direct stock purchase plan is the ability to incrementally invest in an inexpensive way. This might make it a good choice for some first-time investors with smaller amounts of money to invest, with initial deposits ranging from $100 to $500. In some cases, initial deposit minimums can be waived if you purchase a certain dollar value of stock every month. But again, it may be difficult to achieve portfolio diversification with DSPP.

Companies With DSPPs

A number of large, well-established companies offer DSPPs. Companies with direct stock purchase plans include Walmart, The Coca-Cola Company, Starbucks, and The Home Depot, and Best Buy, among others.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

What to Consider Before Buying DSPPs

When online investing was new, people typically needed to pay significant fees to brokers to buy stock. In that era, direct stock purchase plans could be money-savers for investors. Over time, though, fees for online investing have lessened, making this less distinctive of a benefit.

In addition, many DSPPs charge initial setup fees, and may have other investment fees, including ones for each purchase transaction or sale. Although they may be small, these fees can build up over time. And it may be challenging to re-sell shares without the use of a broker, which makes this investment strategy more of a long-term one.

Plus, any time a share is purchased, some degree of stock volatility comes along with it, though the level of volatility that may exist depends on many variables.

Here’s something else to consider: When owning stock in just one company, or only a couple of them, portfolios aren’t diversified. When you diversify your investment assets, it helps to spread out the degree of risk. That’s because, if one stock’s value decreases, others may rise to balance out that portfolio.

The Takeaway

Direct stock purchase plans are when individual investors can directly purchase shares of that company’s stock without the need for broker involvement. The benefits of DSPPs potentially include purchasing company shares at a discount, and not needing a broker to make the transaction.

The downside of DSPPs is that a limited number of companies offer them, which means that an investor who invests solely through DSPPs may not have the best portfolio diversification.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

What is the difference between a brokerage and a direct stock purchase?

The main difference between a brokerage and a direct stock purchase is this: With a direct stock purchase, an investor buys shares of one company. A brokerage, on the other hand, offers multitudes of different stock options an investor may choose from.

What is direct stock vs portfolio stock?

With direct stock, an investor purchases shares of stock directly from a company. A portfolio refers to a collection of different types of investments an investor may have, including stocks, bonds, or stock funds, to name a few.

What is the difference between DSPP and DRIP?

By using a DRIP (dividend reinvestment plan), investors can buy more stock in companies whose shares they own by reinvesting what they earn from dividends. With a DSPP, an investor can purchase stock directly from a company. Unlike a DRIP, they don’t have to use dividends to purchase shares.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-119

Sep

2025

What Is Volume in Stock Trading? How Investors Can Use It

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is Volume in Stocks?
What Does Stock Volume Tell You?
Where Can You Find Stock Volume on a Chart?
How Traders Can Use Volume
Types of Indicators to Measure Stock Volume
FAQ

In stock trading, volume refers to the number of shares traded in a specific time period. When demand is high and the number of shares traded goes up, the volume goes up. Similarly, when sales are down, that stock’s trading volume drops.

Some investors may analyze volume as a part of a technical analysis strategy to help them make decisions about when to buy and sell a particular stock. Here’s a closer look at volume and how investors may be able to use it.

Key Points

• Stock trading volume is the number of shares traded in a specific time period.

• High trading volume can indicate strong interest in a stock, and high liquidity.

• Low trading volume can signal less enthusiasm, market uncertainty, or lower liquidity.

• Analyzing volume helps investors understand the strength of price trends and potential reversals.

• Various technical indicators, like On Balance Volume (OBV) and Volume Price Trend (VPT), use trading volume to aid investment decisions.

What Is Volume in Stocks?

Trade volume for stock and other securities tells investors how frequently shares in a company are being bought and sold.

Every buy and sell transaction of a particular stock helps contribute to its trade volume. A transaction takes place when a buyer agrees to purchase the shares a seller has put up for sale. If this type of transaction takes place 100 times during a day for a particular stock, that stock has a trade volume of 100.

For stock futures and options trading, volume is based on how many contracts change hands during the set period.

Volume doesn’t tell the whole story of a stock. There are a couple of terms that can help give investors a better idea of the size of a company and how many shares are actually available, including “float” and market capitalization, or market cap.

Volume vs Float

While volume is the number of shares that are being actively traded during a given period, float is the number of shares that are actually available to trade. This total does not include restricted shares, which are not registered and are usually given to corporate leaders as part of a compensation package. Outstanding shares refers to all of the stock a company has issued, including restricted shares.

Stocks that have a small number of shares — usually between 10 million and 20 million — available to trade are what is known as “low-float” stocks. Large corporations, by contrast, could have floats of billions of shares.

In certain circumstances when trade volume is very high, volume can surpass float or even number of outstanding shares.

Volume vs Market Cap

Market cap is the total number of outstanding shares multiplied by the current public market price. In other words, it’s the dollar amount required to buy up all outstanding shares of a company, including restricted shares.

Market cap helps investors understand the size of one company relative to another. For example, large-cap stocks tend to be companies worth $10 billion to $200 billion, while small-cap stocks tend to be companies worth $250 million to $2 billion.

Investors can calculate free-float market cap by excluding restricted shares.

What Does Stock Volume Tell You?

Stock volume tells investors how much demand there is for a stock. The greater the volume, the more demand there is, while smaller volume translates to lower demand

High trade volume can also indicate that stock orders are being executed quickly and that the market is highly liquid. In other words, high volume can mean that buying and selling the stock is relatively easy.

What It Means When Stock Volume Goes Up

When stock volume is on the rise, it typically means that prices are on the move, either in the upward or downward direction. As volume increases, it can mean that investors are committing to the price change; a trend may be gathering strength.

Generally speaking, higher volume means that there’s increased interest in buying a stock, and that the market for that stock is more liquid, making it easier to buy and sell shares.

What It Means When Stock Volume Goes Down

When stock volume starts to decrease, it can signal that investors are less enthusiastic about a company. Volumes can decrease even as stock prices increase.

Low volume can be a signal for investors to be cautious about a stock. It can signal market uncertainty, the possibility of stock volatility on the horizon, and lower liquidity.

Recommended: Stock Market Basics

Where Can You Find Stock Volume on a Chart?

Investors can usually find information about volume next to or below the stock chart provided by trading platforms or media sources, like Yahoo Finance or the Wall Street Journal.

Often, volume is tracked using a candlestick chart, in which investors look for patterns to help make investment decisions. Normally, candlestick charts measure a stock’s price, including highs, lows, and opening and closing prices over a given period.

The resulting figure looks a bit like a candle with a line, or “wick,” that represents highs and lows and a rectangle that marks opening and closing prices. Volume candlestick charts use the width of the rectangle to indicate volume. The higher the volume, the wider the candle.

How Traders Can Use Volume

We’ve already seen that volume can help investors understand when a price trend is picking up steam. There are a few other basic guidelines investors may want to consider as they’re deciding when to buy and sell stocks.

Exhaustion Moves

Exhaustion moves occur when there is a sharp movement in the price of stock coupled with a sharp increase in trading volume. This potentially signals the end of a current price trend. These moments can be accompanied by a period of volatility.

Price Reversals

If the price of a stock has moved in one direction for a long time and volume begins to increase at the same time that prices start to move very little, it can signal a reversal. So if stock prices were on an upward trajectory, changes start to slow and volume increases, it might mean the trend is about to reverse.

Breakouts

A breakout is a point at which changes in market trends occur. Changes in volume can clue investors into the strength of the breakout. Little change in volume suggests investors are paying the breakout little heed, while big changes in volume indicate a strong new trend.

Bullish Signals

Volume can also help investors identify bullish signs that suggest prices are likely to rise. For example, say stock prices increase and then decline. At the same time there is an increase in volume which drives prices up again. The stock again declines, but if it doesn’t decline the second time as much as it did the first time, it may be a bullish signal that prices will continue to rise.

Types of Indicators to Measure Stock Volume

There are a number of volume indicators that could help traders make investment decisions based on their approach and goals. Here are a few examples.

On Balance Volume (OBV)

On balance volume (OBV) is a cumulative technical indicator in which volume is added on days when overall volume is up and subtracted on days when overall volume is down. The direction of the indicator is what is most important to investors. When price and OBV are moving up or down together, it is likely the trend will increase in strength.

Volume Price Trend (VPT)

Similar to OBV, volume price trend measures cumulative volume. However, it differs in that it considers a percentage increase or decrease in price. VPT helps investors relate share price to trading volume. If the price of a stock increases, so does the value of the indicator. If prices fall, the indicator value falls, too.

Ease of Movement

This indicator helps traders see how easy it is for a stock price to move between levels based on trading volumes. Stocks that continue along a trend for a given period are considered “easy.” This indicator is used over longer time periods and in volatile markets in which it can be hard to spot trends.

The Takeaway

Stock trading volume measures the amount of shares traded in a given day or time period. Trading volume can also apply to other types of securities and derivatives, where contracts are traded. Examining volume and other tools in technical analysis can help investors make decisions about when to buy and sell stocks.

When buying any individual security, investors should be sure to consider how it fits into their overall financial plan, including their goals, risk tolerance, and time horizon.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Is high trading volume good?

High trading volume indicates an uptrend in a stock’s shares being traded, which is often a sign of investor interest. This may lead to higher prices, but trading volume is only one indicator that investors should consider when buying and selling stocks or other securities.

Can trading volume rise, but prices fall?

Yes. If trading volume is high, but prices are dropping, that could indicate that there is downward pressure on that stock price — or it could be a bullish signal, that there might be a price reversal. Again, it’s wise to use more than one indicator to assess price trends.

What does low trading volume mean?

Low trading volume often indicates a lack of liquidity, which means that it can be harder to buy and sell shares. Low volume also indicates a lack of interest or demand for the stock.

Photo credit: iStock/shapecharge

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-103

Sep

2025

What Is IPO Due Diligence?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Table of Contents

IPO Due Diligence Process
Objective of IPO Due Diligence
Benefits of Due Diligence Process
Next Steps in Filing an IPO
FAQ

As part of the IPO process, private companies must perform due diligence to ensure that they’ve met all the requirements for being listed on a public exchange. This ensures that the company follows all registration and disclosure guidelines established by the Securities Act of 1933.

Broadly speaking, IPO due diligence is similar to the due diligence performed in other situations involving large amounts of capital. Just as an investor may research certain aspects of a company before deciding to purchase shares, a company that’s planning an IPO must have an understanding of the various factors that could positively or negatively affect its success.

If you’re interested in IPOs, it’s helpful to know what goes on behind the scenes and how the IPO due diligence process works, given that IPO stocks are considered high-risk securities.

Key Points

• IPO due diligence is a process of researching a private company to make sure it meets the requirements for being listed on a public exchange.

• The due diligence process involves gathering information about the company’s organizational structure, licensing and taxes, board and employee information, financial information, customer/service information, and company property.

• Benefits of IPO due diligence include an opportunity to explore the viability of an IPO for the company and more information for investors on the company and its risks.

• Steps to filing an IPO include SEC review, IPO roadshow, pricing, launch, stabilization, and transition to market.

• Due diligence can help inform investors whether the company complies with all relevant SEC regulations.

IPO Due Diligence Process

During the IPO due diligence process, the IPO underwriters and IPO attorneys will work together to perform the necessary background research to gain a better understanding of the company, its management, and its financials. This involves gathering the following information:

1. Organizational Data

During the first stage of the IPO due diligence process, the underwriters and attorneys gather information about the company’s organizational structure. This may include requesting copies of any or all of the following:

• Articles of incorporation

• A list of the company’s shareholders and committees

• An overview of the number of shares owned per individual shareholder

• Annual business reports for the previous three years

• Company business plans or strategic plans

• A breakdown of the company’s organizational structure, including board members, directors, and employees

The underwriting team may also request a copy of a certificate in good standing from the state’s Secretary of State, along with information on organizational decision-making.

💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

2. Licensing and Taxation

The next step in IPO due diligence involves collecting information about the company’s licensing and taxes. At this stage, the IPO underwriter and/or attorneys may request copies of:

• All business licenses currently issued to the company

• Annual tax returns

• Government licenses and permits held by the company

• Employment tax filings

• Comprehensive reports of the company’s tax filing data

The underwriting team may look back three years or more when analyzing income tax returns and tax filing information.

Recommended: The IPO Process

3. Board and Employee Information

Due diligence can also extend to information about the company’s board of directors, its managers, and its employees. At this phase of IPO due diligence, underwriters and attorney may request:

• A list of all individuals it employees

• Information about employee status, including each employee’s position and salary

• Details regarding employee benefits and bonuses, according to position

• A copy of company policies relating to sick leave or conflict resolution

• Details about employee insurance benefits, including health, disability and life insurance

• Copies of resumes for leading personnel

• Copies of employee audits

With regard to employee audits, underwriters may look back two to three years.

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4. Financial Information

A company’s finances can come under close scrutiny during the IPO due diligence process. When considering financial information, the IPO underwriting and legal team may review:

• Copies of broker or investment banking arrangements

• Company financial statements records, including previous financial audits

• A list of all financial accounts held by the company

• Copies of financial analyst reports

• Information about the company’s inventory holdings

• Details regarding the company’s accounting and amortization methods

• A list of all fixed and variable expenses

The timeframe for which underwriters can review financial information can stretch from the previous three to five years, depending on what they’re examining.

Recommended: How to Read Financial Statements

5. Customer/Service Information

Due diligence also takes into account interactions with customers and service practices. During this step, the underwriting team may request:

• Reports or information about the products and services offered by the company

• Details about consumer complaints filed against the company

• Information about legal approvals for the company’s products and services

• Copies of the company’s trading policies

• Details regarding the company’s marketing strategies as well as copies of marketing materials

The underwriters may also need to see copies of customer supply or service agreements.

6. Company Property

Last but not least, IPO underwriters will examine property holdings owned by the company. This can include reviewing information about:

• Business locations

• Real estate agreements and/or franchise licenses

• Trademarks and copyrights held by the company

• Approved patents held by the company

• Trademark complaints, if applicable

• Official contracts showing the purchase of real estate

The underwriters may also ask for a full inventory of any physical or real property the company owns.

Objective of IPO Due Diligence

During due diligence, the underwriting team is working to gain a full understanding of how the company operates, how it’s structured, how healthy it is financially, and whether there are any potential issues that could be a roadblock to going public. The due diligence process effectively clears the way for the next steps in the IPO process.

The IPO due diligence process ensures that there are no surprises waiting to crop up that could derail a company’s progress. It’s also an opportunity for the underwriting team, the IPO attorneys, and the company itself to assess any potential risk factors that may affect the IPO’s outcome.

Benefits of Due Diligence Process

IPO due diligence has benefits for both the company and investors.

IPO Due Diligence Benefits for the Company

• Due diligence offers an opportunity to explore the viability of an IPO, based on the company’s business model, financials, capital needs, and anticipated demand for its shares.

• Due diligence also allows the company to avoid going afoul of regulatory guidelines, and it can help to identify any issues the company may need to address before going public.

IPO Due Diligence Benefits to Investors

• The due diligence process can reveal more about a company than the information in the initial red herring prospectus. In IPO investing, a red herring refers to the initial prospectus compiled for SEC registration purposes.

• If investors feel confident about the information they have, that could help to fuel the success of the IPO which could mean more capital raised for the company and better returns for those who purchase its shares.

Note that an investor’s eligibility or suitability for trading IPO shares is usually determined by their brokerage firm.

Next Steps in Filing an IPO

Once the underwriting team has completed its due diligence, the company can move on to the next steps involved in how to file an Initial Public Offering (IPO). Again, that includes:

• SEC review

• IPO roadshow

• Pricing

• Launch

• Stabilization

• Transition to market

The SEC review typically takes between 90 and 150 days to complete. At this point, it’s up to the SEC to determine that all regulatory requirements have been met. Usually, the team conducting the review includes one or more attorneys and one or more accountants.

Next, comes the roadshow. During the roadshow, the company presents details about the IPO to potential investors. This step of the IPO process allows the company and underwriters to gauge interest in the offering and attract investors.

IPO pricing usually involves a closer look at the company’s financials, including its valuation and cash flow. Underwriters may also consider valuations for similar competitors when determining the appropriate IPO price.

After setting the IPO price, the underwriters and the company will schedule the IPO launch. Once the IPO launches, investors can purchase shares of the company. The underwriter can take action to stabilize the IPO price for a period of time following the launch. After that, the company transitions to market competition, concluding the IPO process.

The Takeaway

IPO due diligence is an important part of the IPO process. Due diligence ensures that a company about to go public complies with all relevant SEC regulations. Then, it’s up to qualified individual investors to decide whether trading IPO shares suits their goals and risk tolerance.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is due diligence for an IPO?

Due diligence for an IPO refers to the process of investigating a private company’s financial, legal, operational, and regulatory status to make sure that it meets public listing requirements. Due diligence can also identify any potential risks or problems that could affect the company’s IPO. The goal of due diligence is to verify that the company is ready to go public.

What is IPO compliance?

IPO compliance refers to a company’s compliance with regulatory requirements in order to proceed with an initial public offering. Compliance helps ensure that a company meets financial reporting, adheres to strong governance, and has strong internal controls as required by the Sarbanes-Oxley Act, which was passed in 2002 to help protect investors from corporate fraud.

What are the types of IPO due diligence?

The main types of IPO due diligence include financial, legal, commercial, and operational due diligence. During the due diligence process, IPO underwriters and attorneys will also look at a company’s licensing, tax obligations and history, and board of directors and employees, among other factors. The purpose of due diligence is to verify information in all areas to identify and assess any risks and ensure the company’s readiness for going public.

About the author

Rebecca Lake

Photo credit: iStock/porcorex

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.

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Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
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SOIN-Q325-077

Sep

2025

What Is IPO Subscription Status?

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

Table of Contents

IPO Review
IPO Subscription Status Defined
Why IPO Subscription Status Matters
FAQ

An IPO subscription status describes the position of a company’s initial public offering (or IPO), as it relates to how many committed investors it has prior to the actual IPO.

For example, an IPO may be “fully subscribed,” “undersubscribed,” or “oversubscribed.”

Many investors are intrigued by IPOs, because it’s an opportunity to put money into a relatively early-stage company that has room to grow over time. Some companies draw more investor interest than others, and the IPO’s subscription status is one way to gauge that, because investors sign up with the intent to purchase a certain number of shares.

A company’s IPO subscription status doesn’t guarantee that the stock will perform one way or another. It’s just a preliminary indicator that may help interested investors navigate a potentially risky investment move.

Key Points

• An IPO subscription status describes the position of a company’s initial public offering (IPO) with respect to how many committed investors it has before the actual IPO.

• An IPO is when a company offers shares for sale to members of the general public for the first time through a stock exchange.

• Knowing an IPO’s subscription status can give investors an indication of how much demand there is for shares, and how an IPO stock may perform once it hits the exchanges.

• Typically, only certain investors can participate in IPO bidding and subscribe to an IPO.

• Individual investors may not have access to IPO subscriptions, but research can help them find the right companies to invest in as they go public.

IPO Review

“IPO” is an acronym that stands for “initial public offering.” It represents the first time that a company offers shares for sale to members of the general public through a stock exchange. Prior to an IPO, you would not be able to find a company’s stock trading on an exchange such as the New York Stock Exchange, for example.

Prior to going through the IPO process, a company is private, and its investors usually include its founders, employees, and venture capitalists. A private company usually decides to go public to attract additional investment.

But it’s the tricky period before an IPO, when a company is still private, that many prospective eligible investors look to make a move and get in early. This is when investors “subscribe” to an IPO, which means they’re agreeing or signaling their intent to buy a company’s stock prior to its IPO.

When the IPO executes, those investors may be able to purchase the number of shares to which they previously agreed. Typically, only certain investors can participate in IPO bidding and subscribe to an IPO.

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IPO Subscription Status Defined

A company’s IPO subscription status is a gauge of demand for an IPO. It refers to how many investors have subscribed, or signaled their intention to buy shares in the company. The goal of an IPO is for a company to sell all of its shares — or, to reach an IPO subscription status of fully subscribed, and a valuation in line with its calculations for pricing its IPO.

In that event, all of a company’s shares are spoken for prior to hitting the exchanges, and any leftover shares won’t see their values reduced in order to attract buyers. Early investors looking to cash out after an IPO typically must wait for the lock-up period to expire before they can sell their shares.

Keep in mind that many IPO stocks in the U.S. are bought by large, institutional investors involved with the IPO’s underwriter, an investment bank that helps a company prepare for an IPO and purchases shares in the company and resells them. But although the average retail investor is not typically included in an IPO roadshow, they may still be able to buy an IPO stock at its offering price.

Some brokerages have programs that allow qualified investors to request IPO stocks at their offering price, but there’s no guarantee those investors will actually get the shares.

Recommended: What Is IPO Due Diligence?

Why IPO Subscription Status Matters

An IPO’s subscription status matters in that it can give investors a sense of how an IPO stock may perform once it hits the exchanges.

Shows Demand of IPO Shares

Knowing an IPO’s subscription status can give investors an inkling as to how much demand there is for shares — if demand is high (meaning an IPO is fully or oversubscribed), it’s a signal that an IPO stock may gain value after its market debut. But it’s not a guarantee.

Conversely, an undersubscribed IPO sends a signal that investors aren’t that interested. And when stocks do hit the exchanges, they may see a price reduction soon thereafter.

💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

The Takeaway

While individual investors may not have access to IPO subscriptions, they can still participate in the IPO market. The key is doing thorough research to find the right companies to invest in as they go public.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

How many times can an IPO be oversubscribed?

IPOs get oversubscribed frequently, which means that more investors want to buy shares than a company has available to issue. There isn’t really a limit as to how many times it can be oversubscribed, but depending on the category of investor, it’s not uncommon for IPOs to be oversubscribed dozens or even hundreds of times.

What is an IPO subscription rate?

IPO subscription rates are an estimate of how many bids are received for each investor category (such as retail investors and institutional investors), divided by the number of shares allotted for each category by the company. This helps determine the level of participation among investors in each category.

What does IPO subscribed 2 times mean?

Essentially, it means that demand for IPO shares is twice as high as the number of available shares. The degree of oversubscription is typically shown as a multiple, such as two times, or five times, or whatever the multiple might be. The higher the multiple, the more demand there is for shares.

What happens if an IPO is not fully subscribed?

If an IPO is not fully subscribed, a company may lower the price of its shares or reduce the number of them to try to attract more investors. Undersubscription typically signals low investor confidence and demand.

Photo credit: iStock/SeventyFour

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-082