Note: This article on how to invest in IPOs has long been in the works. I’ll update it over time as platforms change and new technologies and laws emerge. If you have suggestions on how to improve it, please leave your comments at the bottom or contact me with your thoughts.
Access IPOs is about teaching you how to invest in IPOs.
Through my experience investing in IPOs as a self-directed investor and monitoring the market while running this website, I’ve developed this guide to teach ordinary investors the best methods for profiting from IPO opportunities.
Opportunities don’t come easy and there are no guarantees. Even if you manage to gain access to an IPO, the allocation may never come through. Other times, the companies available are low-quality from the start and profits never materialize.
Worst of all, you can lose a lot of money investing in IPOs.
Some IPOs are a huge success and IPO investors can make quick profits or continue investing for the long-term. These are the opportunities we want to find. To access and profit from IPOs, you’ll need to develop a game plan and stick to it.
To make this guide accessible to all kinds of investors, I’ve organized the IPO investing process into five elements. By focusing on these elements to formulate a strategy, any U.S.-based investor has a chance to access IPOs and profit from them.
With that, let’s jump into the world of initial public offerings and learn how to invest in IPOs.
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This article assumes the reader is an experienced investor. You should first understand the basics of investing, the stock market, how to evaluate individual stocks, and basics of initial public offerings (IPOs).
The process of an initial public offering is complicated behind the scenes, but they all follow the same general process. Most of your involvement will take place in the final week of the offering.
This article is not a recommendation to buy or sell IPOs, and it assumes the individual investor understands the risks associated with investing in stocks with elevated risk, including IPOs.
Please always perform your own due diligence before investing in an IPO. Don’t invest money you can’t afford to lose.
The Five Elements of IPO Investing for Ordinary Investors
To organize the fundamentals of investing in IPOs, I’ve broken down the process into five parts I call the Five Elements of IPO Investing.
Objective – Why do you want to invest in IPOs? How does IPO investing fit in with your overall investment objectives? What do you want to accomplish with each IPO investment?
Access – Access to IPOs is often the biggest challenge for ordinary investors. This guide will teach you how to increase your chances of getting access to IPOs.
Analysis – Proper due diligence should be performed on any potential IPO opportunity. In addition to traditional valuation metrics, IPO investors need to consider other less quantifiable factors.
Action – Before, during, and after an IPO, you’ll need to take timely action to gain access and receive an allocation.
Allocation – Receiving a stock allocation from an IPO before the trading starts is an exciting event. Once you are allocated shares, the rest is up to you. Some stocks are long-term holds. Others may be shorter-term holds. How you behave with your investment may impact your access to future IPOs.
After you receive an allocation and the stock opens for trading, you own the stock just like any other stock. Access IPOs is not an advocate for and does not provide advice about trading or flipping IPOs once a stock is publicly traded.
We’ll take a look at each of these in depth below. All IPO investors should consider each of the five elements before, during, and after an IPO investment opportunity.
Before pursuing IPO investment opportunities, individual investors should consider how IPOs fit into a broader investment strategy.
Ask yourself the following questions:
- What is my overall investment objective?
- What is my primary reason for investing in IPOs? Be specific.
- Does IPO investing fit into my overall investment goals?
- Can my portfolio tolerate volatility and potential loses?
Most investors say they want access to IPOs to make more money, obviously. But you need to go a level deeper than that.
Do you want to make a quick buck? Or are you interested in long-term gains?
IPOs are one way to increase the risk/reward profile of your overall portfolio. If you primarily invest in index funds or individual stocks, IPOs can be a way to generate alpha, or gains above market returns.
For example, had you invested in the Google IPO in 2004, you would have made 18% on the first day of trading. That’s a nice one-day pop if you sold that day.
But if you held the stock for the next 12 years, your investment would have risen 1,752.94% or about 18.5 times.
Certainly, many of the investors who flipped shares of Google on the first day of trading are kicking themselves. Google was an outlier. But it’s an example of how IPO investors should consider both long and short-term impact of their IPO purchases.
Earning a quick one-day gain is exciting. However, flipping IPO shares (selling within the first 30 days) can lead to consequences for future access.
For example, Fidelity requires investors to hold shares for 15 days or else risk a penalty.
Selling an IPO on the first day is tempting. And sometimes, in the event of a big increase in the price, it’s prudent. But depending on which platform you’re investing on, flipping may negatively impact your access to future IPOs.
Understanding these types of decisions and how they weigh against your broader portfolio objective is important when learning how to invest in IPOs.
IPO access has long been reserved for elite investors and institutions. Allocations for high-demand IPOs go to the underwriter’s best customers and investors with large account balances.
But in the past five years, a few brokerages have disrupted the underwriting game by providing access to ordinary investors with as little as $100.
In this section, we’ll look at a few methods ordinary investors can use to gain access to IPOs.
Traditional Access – High Account Balance Investors
Some online brokerages provide IPO access to its customers. But not all customers are considered equal.
Traditional brokers who have relationships with underwriters sometimes receive IPO shares to distribute to customers. Because of the overwhelming demand for some IPOs, not all customers can get access. Certain brokers and underwriters have relationships which dictate where allocations are distributed.
To shrink the pool of investors, the brokers require account minimums. For example, TD Ameritrade requires a $250,000 minimum account balance or 30+ trades in the past three months.
Other brokers such as ETRADE claim to offer access to everyone. But low account balance customers are unlikely to receive an allocation for a high-demand IPO.
If your account balance is below the stated threshold, you won’t get access from a full-service online broker. Even if you meet the minimum balance, the really hot IPOs are difficult to get access to. You’ll need an account balance higher than the minimum.
Most brokers give preference to their highest value customers. If that’s not you, you’ll need to find other sources of access.
For a comprehensive list of brokers providing IPO access, check out the best brokers for IPO investing page.
Back in 2013, a startup called Loyal3 created an online brokerage on the idea that a company’s customers make the best shareholders. Included in that relationship is the IPO.
Why not provide IPO access to your existing customers, and make them shareholders for life?
Loyal3 identified a company’s customers as having an even greater likelihood of holding IPO shares over longer periods than non-engaged investors. Having a stake as a shareholder and customer strengthens the customer relationship, making the shareholders more like to remain loyal to the company.
Loyal3 put this concept into practice by building the IT infrastructure and relationships to bring selected IPOs to its platform.
Many Access IPOs readers found this website via previous Loyal3 IPOs. Anyone with a Loyal3 account could invest in IPOs, as long as they were prepared and could act quickly when the opportunity became available.
Loyal3 IPOs were available on a first come first served basis. As accounts grew, access became more difficult. Access IPOs and our readers would study the SEC filings for clues to which IPOs might have access.
One of the best ways to gain access to upcoming IPOs was to be a customer of the company going public. For example, customers of GoPro, At Home, Blue Buffalo, and Square Inc, we’re all offered shares of the IPOs before everyone else.
So for a time, we recommended IPO investors become customers of certain companies after their S-1 filings were submitted, but before the IPO.
But now that Loyal3’s customers were acquired and the service is gone, this strategy less effective.
That doesn’t mean a company won’t do this in the future. It’s less predictable now. The YETI IPO is one example where customers may get selective access based on the S-1 filing.
At Access IPOs, we still try to identify these companies before and after the S-1 filings. But we look for different attributes.
In particular, certain underwriters are more likely to offer shares on the Motif Investing platform. For example, some J.P. Morgan-led IPOs are offered on the Motif Investing platform. So we pay closer attention to J.P. Morgan-led IPOs.
As of writing this article, Motif Investing is the leading online brokerage for IPO investing. The company built a similar IPO platform to Loyal3 and partnered with J.P. Morgan to exclusively offer IPOs on its platform.
IPOs were slow to get started. It took more than a year for the first J.P. Morgan-led IPO on the Motif Investing platform. That was the Trivago IPO which took place in December 2016, more than a year after the partnership announcement.
The platform executed flawlessly and IPO investors were encouraged by the development. Since then we’ve seen an explosion of deals on Motif from a number of lower tier underwriters, but also a few from Goldman Sachs and Credit Suisse.
See the whole list of past Motif IPOs here.
Past deals included a few more J.P. Morgan-led deals and some of the first Reg A+ IPO deals to hit the scene, though these never made it to market. We’ve also seen Motif expand their access to IPOs by partnering with other large and many smaller boutique IPO companies.
By having an open account with Motif Investing and being on the IPO email list (sign up here), you’ll receive alerts from the company for new opportunities.
From time to time, Access IPOs will send alerts if we have advanced knowledge of a hot IPO. The Redfin IPO (RDFN), for example, our email went out an hour before everyone else learned about the deal.
This is less common now as Motif tends to hold its cards close to its chest these days. When we do get advanced word of an IPO, subscribers receive an email alert or published article detailing the opportunity.
Aside from mobile access to your brokerage and maybe a text alert, IPO investing has been largely untouched by newer technologies such as smartphones and the mobile internet.
But one company is building a smartphone app that could change that.
The IPO process is onerous for underwriters and they’re paid well for it. Hot IPOs, such as the Snap IPO, have no shortage of willing investors who want a piece of the action.
But hundreds of companies have IPOs and secondary offerings each year. Many are boring and unknown. Underwriters still need the liquidity of early buyers, but the demand isn’t always there.
With its app and existing customer base, ClickIPO facilitates the allocation of shares to its customers. The app is linked to each investor’s existing brokerage account.
Click IPO has a proprietary Investor Score which rates each IPO investor, primary by how long they typically hold an allocation.
The longer an investor holds the stock, the more attractive that investor is to an underwriter. If an investor typically “flips” IPO shares, their score falls which would decrease the likelihood of receiving high-demand shares of certain IPOs.
The ClickIPO app is expected to begin beta testing in the late Summer of 2017. The company will partner with numerous online brokers and underwriters to provide access to ordinary investors.
You can sign up for their email list here and be one of the first to try this exciting and disruptive technology. The smartphone app is now available on iTunes for IPO research.
Read my initial piece on ClickIPO here. I’m optimistic we have a lot more to hear from these guys.
Equity Crowdfunding and Reg A+ IPOs
Legislation passed in 2012 just might open the floodgates for IPO investing. But not in the traditional sense.
The Jumpstart Our Business Startups (JOBS) Act of 2012 contains numerous security law provisions that enable startups to access capital in the earlier stages of their life-cycles.
You’ve probably heard of crowdfunding sites such as Kickstarter and Indigogo. These platforms empower inventors and entrepreneurs to access seed money from ordinary people in exchange for a product or service of some kind.
The JOBS Act takes this a step further. Now you can become your own personal venture capital fund.
Individuals can now invest seed money into pre-revenue and even pre-formation startups.
It works like this. An aspiring entrepreneur has an idea for a business. She/he writes up a business plan, then presents the plan to the masses through a compelling crowdfunding campaign.
Individuals who believe the idea may have some legs can invest small amounts into the startup, providing seed money. If enough people fund the campaign, the startup will have enough money to implement the business plan.
In exchange for the cash, the individual receives equity in the startup.
This is, in fact, a kind of initial public offering. So traditional IPO investors may be interested.
The vast majority of these companies won’t ever see a profit, and much of the initial funding will never come back. But an investment in that one idea that takes off could be quite profitable.
We haven’t see the first huge success story yet. But the foundations are in place for the next Google or Facebook to start this way.
Investing in equity crowdfunded companies come with a lot of risks. Once you invest, there’s a good chance you’ll never see your money again. Liquidity is poor. Most of these startups are in the early stages and won’t return capital to investors for at least five to seven years.
Only invest money you can lose or won’t need for a long time.
Also included in the JOBS Act is something called Regulation A+ IPOs (“Reg A+”). The JOBS Act of 2012 now allows smaller companies to begin publicly trading through an IPO in the early stages of the business.
It’s still an IPO, but the company is more like a start-up.
Reg A+ IPO deals are typically priced in advance and the investor can choose to invest based on a firm price instead of a range.
Motif Investing has shown they will partner with Reg A+ IPO candidates and underwriters to provide exciting early investing opportunities.
But a more focused online broker-dealer called BANQ has entered the scene. BANQ and its parent company, Tripoint Global Equities, was behind the Myomo IPO (MYO) and Fat Brands IPO (FAT) BANQ allows investors to either open an account to invest or invest via escrow and transfer shares to an existing brokerage.
Click here to see more deals in the pipeline at BANQ.
Another investment bank at the forefront of Reg A+ IPOs is WR Hambrecht + CO who led the ShiftPixy IPO (PIXY).
Dawson James, a registered broker-dealer, has also had its hands in recent deals, acting as both underwriter and selling group member.
Invest After the IPO
Let’s not forget that once an IPO begins trading, anyone with a brokerage account can invest. Maybe you’d have missed out on the first 18% of Google on its first day of trading. But ultimately, newly trading IPO stocks have as much upside potential as any other stock.
If you like the company prospects and did not get into the IPO, buy the stock either the first day or on an early pullback. All winning stocks start with an IPO.
Click here to see a list of best online brokers for IPO investing.
IPO analysis can be broken into three parts:
- Broader IPO Market and Pipeline
- S-1 Analysis
- IPO Demand and Hype
Broader IPO Market and Pipeline
The IPO market is strongest when the broader stock markets are healthy and uncertainty is low. The best conditions are usually during a bull market period when economic growth is positive.
IPO market health can also be judged by the success of other recent IPOs, particularly in the same sector. If similar companies recently launched an IPO, other companies in the same industries will often follow.
Geopolitical events, international conflicts, presidential elections, and Federal Reserve activity also play a role.
IPO investors should be constantly following the IPO news, pipeline, and company filings. On Access IPOs, I’ve tapped into the RSS feed of the S-1 and 1-A (for Reg A+ IPOs) forms from SEC.gov to provide easy access to up-to-the-minute filings.
Not all of the filings are relevant. Some filings are called “blank check” filings, meaning the company isn’t well established but is still aiming to fund itself through an IPO.
Before investing in an IPO, the investor should fully vet the opportunity. Basic equity valuation skills are needed for due diligence. But you’re normal online research tools such as Yahoo Finance, Morningstar, or your brokerage research center won’t work yet because the information isn’t available there yet.
That’s because the information you need is only in the SEC filing.
For Reg A+ IPOs it’s called Form 1-A. Some foreign IPOs filing in the U.S. are registered as Form F-1.
The S-1 is the first formal filing required by the SEC for any company aiming to trade publicly. This document follows a consistent format throughout. I won’t go through it step-by-step because it’s fairly intuitive and indexed for ease of navigation.
The document includes basic business information, underwriters, planned funding amounts, share data, financials, and company risks.
This document is sometimes accompanied by an investor presentation shared with investors leading up to the IPO. The investor presentation is a more reader-friendly PowerPoint presentation with nice photographs, charts, summaries, and data on the company’s market opportunity.
The S-1 is the primary document for all IPO investors to study. But it’s not the only evaluation.
It should be noted that S-1 filings can be made confidentially if a company’s annual revenue is less than $1 billion. However, as the IPO approaches, the filing is made public weeks before the offering.
IPO Demand and Hype
Due diligence and traditional valuation metrics are critical for learning how to invest in IPOs. However, there’s a third component that is less quantitative. Demand.
Demand for IPOs is difficult to measure as an ordinary investor. The basic idea is you want to determine if investors like the company and pricing or not.
The price range is one factor to consider to help make this determination. The IPO price range is disclosed in the IPO prospectus and usually via your broker. The range is usually about $2-$3 dollars. For example, the underwriters might price the range from $14-$16.
The night before the IPO starts to trade, the underwriters announce the final pricing. If the final price at the high end or higher than the range, it’s a signal of good demand. Low or below the range, bad demand.
When demand is on the high end the IPO often increases in value when the stock begins to trade. If demand is low, the offering will be flat or down.
However, if a deal is priced too high, investors may be less likely to buy the deal. This was the case with Facebook when underwriters priced the deal too high and the stock subsequently fell for a period after.
The opposite was true with the Square IPO. The pricing by the underwriter was disappointing to selling investors (venture capital, employees etc.) as it was priced below the range at $9. Investors with access, on the other hand, rejoiced when the stock jumped 45% on the first day of trading.
Pricing the deal plays an important role. Only the underwriters and their connections have a view into this window. Individuals need to judge demand by utilizing publicly available resources to read as much as possible about the deal. This includes but is not limited to sites such as Seeking Alpha, Bloomberg, The Motley Fool, and the Wall Street Journal.
Other less reputable sources include the hashtags of Twitter and various trading forums around the internet. The more media coverage and household knowledge of a company, the higher the early trading often goes.
As someone who invests completely independent of Wall Street and the securities industry, it seems the best way to learn about IPO demand is to know someone working at the company or underwriter. Often times, those with knowledge of the deal share information on Twitter or elsewhere, without, it is assumed, violating any insider trading or securities regulations.
I don’t know any of these people personally, so I use Twitter and other news outlets to make my determinations.
This is a place where many of us in the community are still learning. Collaboration within our community may help as well.
Access is useless if you’re not ready to take action.
When demand for hotly-anticipated IPOs is high, it’s less likely that you will find access to the deal.
The Snap IPO was a good example. Very few readers reported receiving an allocation. The stock soared thanks to high demand.
If you do find access to a hot deal, you’ll need to take timely action or you’ll miss out.
All brokers use email to inform eligible investors when an IPO opportunity is live. For most, having an account is not enough. You’ll need to be on the IPO interest email list as well. Check with your broker to see if they offer IPOs and find out how to learn about upcoming deals.
When you receive an email inviting you to participate in an interesting deal, quickly respond to reserve your shares. Give yourself an advantage by implementing email alerts on your smartphone when they come from your broker.
I always say to reserve your shares first and complete due diligence second. That’s because deals come and go quickly. To spend the proper amount of time to study a deal before reservation would mean you’d miss out.
Once you’ve made a reservation, you can then proceed to complete your due diligence and decide if you want to invest or not. You can back out by either withdrawing your reservation or by failing to fund your allocation. No funds, no shares.
The evening before an IPO begins trading on an exchange, the underwriters price the deal. If the deal is within the price range, investors can sit tight and wait for their allocation.
When the pricing is outside of the range, you’ll need to pay attention to communication coming from your broker. In this event, you may need to confirm your reservation request before receiving an allocation. Motif uses both email and text messaging to confirm a reservation. Other firms use email as their primary communication tool.
After learning about a deal, reserving shares, performing due diligence, and paying attention to the IPO pricing, investors who successfully participate in an IPO are rewarded with an allocation.
The allocations are distributed after the pricing of the deal. Pricings usually take place after the market closing the night before an IPO with the allocations to follow.
The allocation is the physical placement of shares into your brokerage account. You may receive all or a fraction of shares requested depending on how many shares are available through your broker and deal wide. An email typically follows to inform you of the allocation amount.
If you’re investing via escrow, which is common on some sites such as BANQ, it may be a day or two before the shares are delivered. For Motif, TD Ameritrade and other large online brokers, it’s done in real time.
Your allocation will show in your brokerage account. Once the stock begins trading on the exchange, you are free to hold or sell like any other holding.
Reservations aren’t always fulfilled. Twitter is a good place to discuss allocations with other investors using the hashtag “$XYZ” for the specific stock symbol.
Once you receive an allocation in your brokerage account, the stock begins to trade, the stock is like any other. It may take up to three months for quarterly filing to be updated on your favorite stock research websites. You’ll need to rely on the S-1 filing until then.
At this point, we consider the investment as any other. Keep in mind that if you quickly sell an IPO, you may be penalized by the broker/underwriter that allocated you the shares. This is usually disclosed by the broker in the fine print. Make sure you know your broker’s rules before selling your allocation.
Access IPOs does not provide advice on any particular IPO. You’ll find some websites that do offer this service in the Resources section below. We aim to make readers aware of certain deals and teach you how to invest in IPOs on your own.
At times, we’ll bring certain deals to your attention via a blog post and/or email alert. We highlight these when they are interesting for a variety of reasons. However, when we do write about individual IPOs on this website, it is not a recommendation to buy or sell.
Here’s a list of some of my favorite IPO resources.
- Best Brokers for IPO Investing – via Access IPOs
- SEC S-1 and 1-A Filing Feed – via Access IPOs
- IPO Boutique – Subscription service
- Renaissance Capital – Provider of IPO ETFs
- IPO Scoop – Subscription service
- IPO Dave on Twitter – Notable IPO trader
- List of Previous and Upcoming Motif IPOs – via Access IPOs
Conclusion – How to Invest in IPOs
This article is a first attempt to put what I know down on this website to share with both active readers and new investors exploring the internet for investment ideas. As indicated in the introduction, this article is not a complete guide for everyone.
Traders, IPO flippers, and professional investors may not find what they are looking for here. This article is meant to serve the individual investors looking to gain an advantage over the market with IPO investing. I and many readers of the past few years have found profits in IPO investing and you can too.
If I can improve this article in any way to teach others how to invest in IPOs, I’m open to suggestions and adding more information where applicable. Keep an eye out for changes in the future. Please contact me with any information that will make this article more helpful.
Disclosure: Long RDFN, LC
* ClickIPO is an advertiser on this website
Photo credit: skeeze via Pixabay