Initial public offerings occur when a private company comes to the public markets for financing by selling its stock. Big U.S. IPOs typically occur on the NASDAQ or the New York Stock Exchange to great anticipation. After the underwriting bank gives the first price to the stock, it begins trading on the open market with the laws of supply and demand governing the price. Individuals and professional investors are free to buy this stock to make or lose money.
Purchasing IPO Stock
Purchasing IPO stock depends on when in the process you buy it. In any case, you must work through a registered stockbroker. If the company is not yet public, go to its website and call the investor relations representative at the firm's contact number. Inquire if shares are for sale in a private offering and at what price. If possible, the representative will direct you to the firm's broker dealer to complete the sale by wiring funds to the firm. They will then issue you stock certificates. If you want to purchase stock at the IPO or afterward, register with a stockbroker and wire funds to your brokerage account. When the IPO occurs, call your broker or go online, enter the stock symbol of the company and purchase the amount of shares you want. The company will issue you virtual certificates for the amount of shares you purchased.
IPO stock can be bought before or after the underwriting broker sets the opening price. To buy the stock before the price is set, you must be a professional investor or have a special relationship with management. However, these investments are generally in very large amounts in the millions of dollars. They are also more risky than a stock market investment because the shares are much more difficult to sell before the IPO.
The IPO price is the official price that the investment bank underwriting the deal will use to sell to the large institutional investors for the first trade of the stock. However, individuals also have the opportunity to purchase at the IPO price under special conditions. In particular, if you have a stock trading account at the same bank that is underwriting the IPO. For example, Morgan Stanley was the lead underwriter of the Facebook IPO in its 2012 debut. It allowed some of its clients to purchase at the $38 per share opening trade. Unfortunately, many of those investors lost money as the stock dipped precipitously in the months following the IPO.
After the IPO stock has begun trading, it can be bought or sold just as any other stock. In fact, on the first day of trading it is often easier to buy the stock due to the high number of shares bought and sold (or liquidity). For example, during Facebook's IPO in 2012 more than 80 million shares were bought and sold in the first 30 seconds through high-speed computer trading. Any investor with access to a stockbroker or trading account can purchase shares on the open market for the rest of the day.
The big attraction of an IPO is that it will have a major pop on the first day of trading. In 2011, the shares of LinkedIn rose 109 percent from $45 to $94.25 on the first day, one of the largest first day gains in recent history. IPO investors hope to achieve these massive gains on the first day of trading as the public market truly validates the company's worth. During the Internet bubble of the late 1990s, huge IPO gains occurred regularly.
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