The investment banks that underwrite an IPO typically allocate shares to their favored clients, who jealously guard every share. You can open a brokerage account if you're wealthy enough, but there’s still no guarantee of getting in on an IPO. Investors need to evaluate whether the trouble and cost of obtaining IPO shares are worth the potential reward.
Open a trading account with a brokerage firm such as Fidelity Investments that has access to IPO shares. Be forewarned that most firms require their clients to have a minimum asset base of $500,000 in addition to meeting income requirements and trading experience in order to participate in IPO offerings. If you are fortunate enough to buy IPO shares, be careful about flipping them for a fast profit. Brokers want their clients to hold the shares for at least 60 days and will block clients who flip from participating in future IPOs.Step 2
Contact the investment banks underwriting the IPO offering directly. Goldman Sachs, Morgan Stanley, Deutsche Bank and JP Morgan Chase are the largest IPO underwriters and primarily allocate large chunks of IPO shares to institutional clients. Very few individuals are able to buy IPO shares directly from the underwriters unless they are very wealthy or well-connected.Step 3
Trade in the secondary market to get pre-IPO shares. You can open an account with SecondMarket and SharesPost if you meet their accreditation requirements. At a minimum, investors must have a net worth above $1 million or net income exceeding $200,000 for the past two years. The companies also run background checks on all prospective clients.Step 4
Consider investing in options as a means to purchase shares in the company. Options give you the right to buy post-IPO stock, but not the obligation, so if you buy a call option expecting the stock price to rise, and it does just the opposite, your loss is limited to the option purchase price, plus the commission.Step 5
Analyze the three major funds that invest in IPOs. First Trust US IPO Index Fund doesn’t purchase IPO shares, but tracks the 100 largest U.S. IPOs for three to four years. If you want to invest in a fund that holds IPO stock, Renaissance Capital’s IPO Plus buys IPO common shares on the stock exchange and on the secondary market. The newest fund, Direxion Long/Short Global IPO Fund, plays both market directions. The fund holds long positions in IPOs it expects to do well and short positions in IPOs expected to drop in value.
- IPO stock prices can fluctuate wildly on the first day of trading. Wait a few days for the initial excitement to subside before opening a position.
- IPO stocks have limited disclosure and it can be difficult to find enough information to make a good trading decision.
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