It’s not unusual to hear that a company’s stock price has increased by an enormous margin in a day from its price at its initial public offering (IPO), and the close of its first day on the market. Because of this, many savvy investors want to get in on the ground floor of a potentially hot company’s IPO, but, as many investors know, that can be difficult. Companies usually don’t sell shares in an IPO directly to the public, preferring to allow brokerages to serve as underwriters, purchasing shares and then reselling them on the open market. Because these brokerages prefer to sell the stock in large bundles to institutional investors, it’s frequently difficult, if not outright impossible, to purchase IPO shares.
Determine which brokerage, or which syndicate of brokerages, will handle a company’s IPO. The syndicate typically issues a prospectus colloquially known as a “red herring,” which provides insight into the company’s assets and profitability, while listing members of the underwriting syndicate.
Research each brokerage in the syndicate to determine how many individual investors it deals with, as opposed to institutional investors. Brokerages with higher proportions of individual investors may set aside a larger amount of IPO shares for individuals than those who specialize in large investors.
Open an account with the brokerage you determine to be the most favorable to independent investors for the IPO. Contact a broker or an account representative as early as possible to express interest in the upcoming IPO.
Wait until the day of the IPO to determine if the brokerage provides you a chance to purchase IPO shares. While it’s unlikely they’ll reach individual investors, particularly new ones -- that goes double for a hot IPO -- the ability to close the purchase remains largely out of your hands.
The Securities and Exchange Commission doesn’t provide regulation or oversight of brokerage syndicates during the IPO sales phase. Because of this, syndicates are free to allocate IPO shares in any manner they see fit, providing them to large investors and long-term customers as they deem necessary. Although it’s nearly impossible for individual investors to purchase IPO shares, those with a longstanding and good relationship with a brokerage firm stand the best chance of receiving them.