Accessing and purchasing a stock at its initial public offering (IPO) can seem like a VIP invite to a party. In addition to the cache of being “in the know” about potential opportunities, IPO investing can also allow potentially higher returns if the IPO is successful. But how do you find IPO stocks before listing day? And what might the benefits and risks be?
IPO investing is a calculated risk that can be either a short-term or long-term investment. Some investors may invest in an IPO, only to quickly flip it as the price rises. Others see it as a long-term strategy to build their portfolio with younger companies that could grow in value over the years. And, while some IPOs have created massive profits for early investors, others have not delivered on the promise.
This may be of particular interest right now, as 2021 IPOs have already hit a record level, and there are still a number of upcoming IPOs in 2021.
When IPOs Are Offered to People Prior to Listing Day
When people talk about IPO prices, they may be talking about two things:
• The IPO offering price. This is a fixed price available to a limited group of people. This may include employees who were offered stock options as part of their compensation package, as well as certain investors who get access to the IPO fixed rate. This may be less than the share price set when the company goes public. All of these sales occur before trading day and can be tricky to navigate.
• The price of new IPO stocks once the company goes public. This is the price that is available to all investors and fluctuates based on market conditions.
Buying IPOs at their offer price can take some navigation, but that does not mean it’s impossible. Typically, offer prices may be offered only to certain brokerages. For example, SoFi Invest offers IPO Investing.
One way that buying IPOs at offer prices differs from buying stocks already in the market: There is only a certain amount of shares available to each brokerage, and they may be accessible to investors who have the highest account balances. Instead of simply buying the shares, an investor submits an indication of interest (IOI) letter. The buy order may be limited due to availability.
How Do You Find Upcoming IPO Stocks Before Listing Day?
Investors who plan to wait until the unlisted stock debuts may find themselves frustrated that there is little prep time before the stock appears on the market. The secrecy prior to an initial public offering reflects several factors: One is the registration process with the Securities and Exchange Commission (SEC). The company can not publicly sell or trade its stock until the SEC deems the registration statement effective.
Once the company has filed its registration, the company enters what’s known as a “quiet period” where it must adhere to restrictions on what and how much it communicates to the public.
Any “gun jumping” or public communication that nods or hints at an upcoming IPO may violate the Securities Act. But once a company registers with the SEC investors and stock market analysts will keep an eye out for the IPO.
Recommended: What is the IPO Process? 7 Steps to Going Public
So, beyond combing through the SEC database, how can an investor find new companies going public? There are many resources:
Media outlets often report on upcoming and rumored IPOs. Reading through market news can be valuable for new and experienced investors alike, allowing them to have an enhanced perspective on how the market is evolving and which companies may be poised to IPO.
Exchanges, such as Nasdaq, also have trackers on upcoming IPOs, although these are IPOs likely to debut within the next several days.
Brokerages and financial institutions may also report on industry news and trends and may publish IPO tacking. For example, SoFi has a blog which covers the personal finance world, including IPO filings, as well as a daily newsletter to keep you abreast of what is going on in the world of finance, including the markets.
Vetting Upcoming IPOs
With hundreds of IPOs taking place in some years, investors will need to vet any potential offering before they decide to add it to their portfolio. If you’re considering investing in a company as it goes public, you’ll want to comb through all of its public documents to see whether its financials look sustainable. Then, ask yourself the following questions:
• Do I understand the business and the potential investment risks?
• Is the IPO underwriter a well respected, major investment firm?
• How are other companies in this space performing?
• Do the financials justify the IPO price and company valuation?
Recommended: How to Value a Stock
The Pros and Cons of Investing in IPOs
Access to IPO investing can be exciting. It can make an investor feel like they’re invested — literally — in buzzy companies that may be shaping the way we live and work. But they can also be risky. Some companies that may get a lot of media attention may fail to live up to investor expectations. Other companies may hit bumps in the road as they adjust to being a public company facing investor scrutiny. That’s why it can be a good idea for an investor to assess what goals they want their IPO investment to fulfill.
Pros of Investing in an IPO
• It can be exciting.
• There’s potential for significant profits.
• It can allow investors to put their money behind a company they may value, believe in, or otherwise want to be a part of in some small way.
Cons of Investing in an IPO
• While there’s potential for reward, there’s also risk potential that the IPO may flop.
• Market fluctuations may require active management and quick decisions when it comes to holding or selling.
• The volatility of investing in an IPO may require portfolio calibration so that other investments are less volatile.
By doing research, understanding the risks, and having realistic expectations, you can make IPO investments an exciting and potentially rewarding aspect of your portfolio. However, you do not have to invest in IPOs to fulfill your financial goals. If you get stressed about risk and stock volatility, IPO investing might not be the best strategy for you.
Whether you’re investing in IPOs or more interested in traditional stocks and exchange-traded funds, you can get started by opening an account on the SoFi Invest® brokerage platform. SoFi invest offers access to IPO investing with no account minimums for members with an Active Investing account. As with any investment, considering your overall portfolio goals can be key to assessing whether IPO investing is right for you.
Photo credit: iStock/solidcolours
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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. IPOs offered through SoFi Securities are not a recommendation 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 SoFi’s allocation procedures please refer to IPO Allocation Procedures.