IPO stocks can be sold short once they are trading on public markets, known as the secondary market.
While traders can sell short IPO shares, investors allocated IPO shares may have to wait for a lock-up period to expire before they can sell.
Selling short an IPO on the listing day also has extra challenges you should know about. This article will cover how it works, when to do it, and any possible complications you might encounter in the process.
Key Points
• It’s possible to short an IPO once it starts trading on the public market, with some limitations.
• IPO stocks are heavily regulated and it can be difficult to borrow the shares needed to do a short sale.
• Investors should do their due diligence before investing in any kind of stock, as there are no guarantees.
Can You Short an IPO?
IPO stocks can be sold short once they are trading on public markets, known as the secondary market. Shorting IPO shares on the listing day can be done, though there are some challenges.
Shorting a Stock
Shorting a stock is a strategy traders use to profit from a decline in the price of a stock. Any stock available for trading can be shorted. It is risky considering that the stock price can only go to zero — in which case a profit of 100% is realized (not including taxes and commissions). The risk is that the stock price increases. There is no theoretical limit to how high a share price can go.
A short sale happens when you borrow a stock and repay it in the future. The goal is to see the stock drop in value. When you sell short, you buy the shares, immediately sell them, then buy them back later. You want to buy the shares back at a price less than at which you lent them.
There is a fee for borrowing when selling shares short. That cost can be as low as 0.3% (on an annualized basis) for stocks with very little short interest, but it can soar to 30% for hot stocks with extremely high short interest. You might also be required to post collateral to sell short.
For example, let’s say you want to sell short shares of XYZ stock that currently trade at $100 per share. You enter an order to sell short the shares and you receive $100 per share. A month later, the stock price has dropped to $80, and you decide to close your short position by repurchasing the shares in the market. You buy back the shares for $80. Your profit on those stocks is $100 – $80 = $20.
💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.
Challenges of Shorting an IPO
While shorting an IPO on listing day is allowed, there are practical limitations that could make it difficult.
A critical facet to shorting IPO shares is being able to borrow the shares from a brokerage firm. A broker needs an inventory of stock from which to lend and a company often only takes a small part of the company public, which can limit shorting opportunities. On IPO day, the two primary entities holding an inventory of shares are the underwriting banks and investors (both institutional and retail).
The IPO underwriters cannot lend shares for short sale for 30 days, per U.S. SEC rules. Investors can lend out their shares to investors seeking to short the IPO stock. That said, some shareholders might be unwilling to lend their shares.
IPO stocks are considered high-risk investments, and while some companies may present an opportunity for growth, there are no guarantees. Like investing in any other type of stock, it’s essential for investors to do their due diligence.
The Takeaway
You can short an IPO once it starts trading on the public market. But it’s worth remembering that shorting carries risk and there might be a high cost to borrow shares. In addition, IPO stocks are heavily regulated, which can make it difficult to borrow the shares needed to do a short sale.
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.
FAQ
How soon can you short an IPO?
You can short an IPO once it begins trading on the public stock market. The IPO lock-up period typically lasts from 90 to 180 days. It is intended to prevent too many shares from flooding the market in the early days of the IPO. A high supply of shares could drive down the price of the IPO stock.
Can you sell an IPO immediately?
An investor who purchases shares on the secondary market can sell shares immediately. Investors who were allocated IPO shares have a lock-up period before they can sell. Learn more about selling an IPO.
How long until you can sell an IPO?
A company founder, a longtime employee holding company stock, or an investor allocated IPO shares must wait for the lock-up period to elapse before selling their shares. The IPO lock-up period might last anywhere from 90 to 180 days after the IPO. There might be multiple lock-up periods that end on different dates, too.
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