How to Buy IPO Stocks: A Step-by-Step Guide

Understanding the IPO Market and Its Participants
An Initial Public Offering (IPO) represents a private company’s transition to a publicly-traded entity, offering its shares to the institutional and retail public for the first time. This process is complex, involving numerous key players. The issuing company hires one or more investment banks to act as underwriters. These underwriters perform due diligence, determine the company’s valuation, set an initial share price range, and ultimately purchase the shares from the company to sell to investors. A lead underwriter, known as the bookrunner, manages the “book” of investor interest.

Large institutional investors, such as pension funds, mutual funds, and hedge funds, are the primary recipients of IPO shares. They participate in the “roadshow,” where company management presents to them, and place large orders. The vast majority of shares are allocated to these players. Retail investors, meaning individual traders, historically had very limited access to IPOs at the offer price. However, recent technological and platform advancements have begun to democratize this process, though significant hurdles remain.

Step 1: Assess Your Risk Tolerance and Investment Goals
IPO investing is inherently speculative and carries a higher degree of risk than investing in established public companies. Before pursuing any IPO, conduct a rigorous self-assessment.

• Volatility: Newly public stocks are notorious for extreme price swings in their first days, weeks, and months of trading. Be prepared for the possibility of significant short-term losses.
• Limited Historical Data: While a company files a prospectus (the S-1 form), its trading history is non-existent. You cannot analyze long-term stock charts or market sentiment.
• Lock-Up Periods: Company insiders and early investors are typically subject to a “lock-up” period, usually 90 to 180 days post-IPO, where they are prohibited from selling their shares. The expiration of this period often leads to a surge in available shares, which can put downward pressure on the stock price.
• Your Objective: Are you seeking a potential short-term “pop” on the first day of trading, or are you investing in a company you believe has exceptional long-term growth prospects? Your goal will influence your strategy.

Step 2: Research the Company Thoroughly – Analyzing the S-1 Filing
The single most important document for IPO research is the S-1 Registration Statement, filed with the U.S. Securities and Exchange Commission (SEC). This prospectus contains a wealth of information, albeit in dense, legalistic language. Focus on these key sections:

• Business Overview: This describes what the company does, its business model, its products or services, and its industry. Do you understand how it makes money?
• Risk Factors: This is a mandatory, detailed list of all potential risks to the business and the investment. Read this section meticulously. It outlines everything from competitive threats and regulatory hurdles to reliance on key personnel and potential flaws in the financial model.
• Management’s Discussion and Analysis (MD&A): Here, management explains the company’s financial condition, results of operations, and future plans. It provides context behind the numbers.
• Financial Statements: Scrutinize the audited financial data, including income statements, balance sheets, and cash flow statements. Look for trends in revenue growth, profitability (or lack thereof), margins, and cash burn rate. Understand the difference between GAAP and non-GAAP metrics.
• Use of Proceeds: This details how the company intends to use the money raised from the IPO (e.g., to pay down debt, fund growth, for acquisitions).
• Underwriters and Share Allocation: Identifies the investment banks leading the offering and provides details on the shares being offered and the ownership structure pre- and post-IPO.

Step 3: Choose a Brokerage Platform That Offers IPO Access
Not all brokers provide the ability to participate in IPOs. You must open an account with a brokerage that has an IPO allocation program for retail investors. Criteria and requirements vary significantly:

• Major Platforms: Several large online brokers, including Fidelity, Charles Schwab, TD Ameritrade (now part of Schwab), E*TRADE (now part of Morgan Stanley), and Merrill Edge, have IPO offering services.
• Newer Platforms: Some newer, app-based platforms like Robinhood and SoFi have also entered the IPO access space, often with lower account minimums.
• Eligibility Requirements: Brokers often impose eligibility rules. These can include maintaining a minimum account balance (e.g., $2,500, $10,000, or even $250,000+ for some offerings), having a certain number of trades per month or quarter, or holding specific asset types within the account. You will almost always need to be approved for options trading and margin accounts, even if you don’t intend to use margin, as the IPO process is technically a margin transaction until the shares settle.

Step 4: Understand the Mechanics of the IPO Process and Placing an Order
Once you’ve identified an upcoming IPO and confirmed your brokerage offers access, you must navigate the specific steps to request shares.

• Express Interest: During the IPO registration period (before the pricing date), your brokerage platform will list the available IPOs. You must formally express your interest by indicating the number of shares you wish to purchase.
• Conditional Offer to Buy: Placing a request is not a guaranteed order. It is a conditional offer to buy a certain number of shares if they are allocated to you and if the final offer price falls within a range you are comfortable with. Most platforms allow you to set a price limit (e.g., you can set your order to only execute if the final price is at or below a specific value).
• No Obligation: Importantly, expressing interest does not obligate you to purchase the shares. You can cancel your conditional offer at any time before the final allocation is determined.

Step 5: Allocation and Pricing – The Waiting Game
After the roadshow, the underwriters and the company set the final IPO price based on gathered investor demand. This usually happens after the market closes on the day before the stock begins trading.

• Pricing: The final price may be within, above, or below the initial range stated in the S-1. Pricing above the range typically indicates very strong demand.
• Allocation: The underwriters allocate shares to their institutional clients first. The remaining shares are then distributed to the retail brokerage firms. Your broker then uses its own discretionary formula to allocate its received shares among the retail investors who expressed interest. This process is not first-come, first-served. Factors can include account size, frequency of trading, and the size of the share request. It is common for retail investors to receive only a fraction of the shares they requested, or even none at all, especially for highly publicized, “hot” IPOs.

Step 6: Trading Begins – The First Day and Beyond
The company’s stock begins trading on its chosen exchange (e.g., NASDAQ: TSLA, NYSE: SNOW) under its new ticker symbol.

• Opening Price: The first trade price is determined by the market’s supply and demand in the opening auction, which may be significantly higher than the IPO offer price. This is where the famous first-day “pop” occurs.
• Your Shares: If you were allocated shares at the offer price, they will appear in your account. You are free to sell them immediately once trading begins or hold them for the long term.
• Secondary Market Purchases: If you were not allocated shares or missed the IPO window, you can simply buy the stock on the open market once trading commences. However, you will be buying at the market price, which could be substantially higher than the IPO price paid by allocated investors.

Advanced Considerations and Potential Pitfalls

• Direct Listings (DPOs): Some companies, like Spotify and Slack, have chosen to go public via a Direct Public Offering (DPO) or direct listing. This bypasses the underwriters and the traditional IPO process. There is no offer price; shares simply begin trading based on market demand. Brokerage IPO access programs typically do not apply to direct listings.
• SPACs: Special Purpose Acquisition Companies (SPACs) became an alternative, popular path to going public. While less common now than during their peak, they remain an option. Investing in a pre-merger SPAC is a different type of speculation than a traditional IPO.
• The Hype Cycle: Be wary of media frenzy and social media hype surrounding certain IPOs. This can create a “fear of missing out” (FOMO) that leads to poor investment decisions. Base your choice on fundamental research, not sentiment.
• Long-Term Performance: Numerous studies have shown that, on average, IPOs underperform the broader market over a multi-year horizon. The initial pop is often followed by a period of stagnation or decline as the reality of the company’s execution meets market expectations.