Understand how an IPO works from filing to trading day. Learn how to buy IPO stock, know the risks, and explore IPO calendars to plan your investments.
IPOs: What to know
“What’s all the hype?” is a question you might ask when you see an announcement for a company that’s going public. IPOs, or initial public offerings, tend to drum up excitement for investors. But it’s important to understand what the process involves and whether the investment is right for your portfolio.
Key Insights
- IPOs let private companies sell shares to the public, but the process involves preparation, SEC review, pricing, allocation, and public trading.
- IPO access is limited, and individual investors may not receive requested shares even when they're eligible to participate.
- First-day prices can move quickly, so market demand may push shares above or below the IPO price.
- IPOs may not fit every portfolio, especially for investors who are uncomfortable with volatility or have uncertainty about what the company is worth.
- Investors can also consider alternatives, such as using IPO-focused funds, choosing diversified funds, or waiting until shares trade in the secondary market. Keep in mind that prices can continue to fluctuate after trading begins.
What is an IPO?
An IPO is when a private company first sells shares to the public and becomes publicly traded. IPOs happen in the primary market, where companies sell new securities directly through a broker dealer and receive capital in exchange for an ownership stake. After an IPO, shares trade on an exchange such as the NYSE or Nasdaq, where investors buy and sell them in the secondary market.
Note: Vanguard Brokerage Services® doesn't underwrite IPOs or provide access to IPO allocation platforms, so you can't request IPO shares through your Vanguard Brokerage Account before they begin trading. Vanguard portfolios can hold the stock from day 1, even if Vanguard Brokerage clients can't participate directly. Once the security is available for secondary-market trading, you can place an online order through your Vanguard Brokerage Account
Why does a company decide to offer an IPO?
There are many reasons a company might make a move to the public sector: to acquire more growth, to raise capital, to let early investors cash out their investments, or to garner publicity and excitement. The IPO process can be costly and time-consuming, so companies who decide to go public are hoping that the benefits far outweigh the costs.
Understanding the IPO process
Going public is a complex, multistage process that requires extensive preparation, disclosure, and marketing before shares can be sold to investors.
IPO process step-by-step
- Prepare the company and assemble the IPO team. Before filing, the company works with legal counsel, auditors, and investment banks to evaluate whether it's ready for public-company requirements.
- Select underwriters. The company chooses one or more investment banks to manage the offering. These underwriters help structure the deal, estimate investor demand, prepare marketing materials, and coordinate the sale of shares.
- File the registration statement and complete SEC review. The company files a registration statement (typically Form S-1) with the SEC, including a prospectus with key business, financial, risk, and offering details. The SEC may request revisions before the offering can move forward.
- Market the offering. Company leaders and underwriters present the investment opportunity to potential investors to explain the company's strategy and gauge demand for the shares.
- Collect indications of interest. Investors may submit nonbinding indications of interest to show how many shares they might want and at what price. Underwriters use this demand information to help recommend the final offer price and share allocation.
- Set the IPO price and allocate shares. The company and underwriters set the final IPO price, usually the evening before trading begins. Shares are then allocated to participating broker-dealers or selling group members—not directly to end-user individual investors—based on each firm's relationship to the offering and available allocation.
- Begin public trading. Once the IPO is approved and priced, the company and its underwriters determine the trade date, though that date can change.
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Who can buy IPO shares?
Access to IPO shares at the offering price is significantly limited for individual investors, with the vast majority of shares allocated to institutional investors and preferred clients of underwriting firms.
- Eligibility depends on the brokerage and the offering. To request IPO shares at the offering price, you generally need an account with a brokerage that has access to that IPO and may need to meet firm or regulatory requirements.
- Not everyone who requests shares will receive them. IPO shares are limited, and submitting a request doesn't guarantee an allocation, especially if demand exceeds supply.
- Institutional investors usually receive the largest allocations. Underwriters often prioritize large buyers, such as mutual funds, pension funds, and hedge funds, because they can place larger orders and may have established relationships.
- Individual investors may have access, but it's often limited. Individual investors can sometimes participate through brokerages that receive IPO shares, but availability varies by brokerage, account type, and eligibility.
How to buy IPO stock
- Confirm whether you can participate at the IPO price. Check whether your brokerage offers access to the IPO before trading begins, and if not, consider buying once the stock trades in the secondary market.
- Research the company and read the prospectus. Review the company's financials, strategy, risks, offering terms, and planned use of proceeds.
- Decide how much you're willing to invest. Consider whether the IPO fits your goals, risk tolerance, time horizon, and overall portfolio.
- Place a limit order before trading begins, if available. A limit order can help set the maximum price you're willing to pay before the stock opens on the secondary market.
- Monitor when the stock begins trading. IPOs don't always open at the market bell, so watch for trading to begin before adjusting or placing a new order.
- Adjust your open order after trading begins, if needed. Once the stock is trading, you may be able to change the order type, share quantity, limit price, or duration.
- Review your order status and confirm the trade. Check whether the order executed and make sure the position still aligns with your investment plan.
As newly public companies mature and meet specific criteria, they may be added to major market indexes. When that happens, investors in index funds that track those benchmarks may gain exposure to the companies as part of a diversified portfolio. This approach can offer access to newly public companies over time while helping reduce the impact that any single stock's poor performance may have on the overall portfolio.
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IPO risks and potential rewards
IPOs can offer access to newly public companies, but they also come with risks that can be different from buying established public stocks.
Potential benefits |
Key risks |
|---|---|
| Early exposure to a growing company | Growth expectations may not match future performance |
Opportunity to invest in companies with strong public interest |
Investor hype can push prices higher than expected, especially when demand is strong |
Opportunity for price appreciation if the company performs well |
Limited operating history as a public company can make assessing the stock value difficult |
Access to shares before broader secondary-market demand develops |
Allocations may be limited, and you may not receive requested shares |
Investing in IPOs carries significant single-stock risk—the possibility of substantial loss from concentrating your portfolio in one company. That risk can be especially high with IPOs because newly public companies have limited trading history, and their share prices can move sharply on IPO day and in the weeks that follow. Since prices can rise or fall quickly, IPOs may not be a good fit for investors who are uncomfortable with volatility, have shorter time horizons, or prefer a more diversified approach.
Before investing, consider how an IPO would fit within your broader portfolio. You can get a personalized asset allocation recommendation based on your investment objectives, experience, time horizon, risk tolerance, and financial situation.
IPO vs. SPAC
While an IPO is the initial offering of shares from a private company to the public, a special purpose acquisition company (SPAC) is a shell company that doesn't have any business operations. Instead, it raises capital to assist with the future acquisition of another company.
Alternatives to investing in IPOs
If you're interested in IPO investments but are concerned about the challenges of accessing offering-priced shares, consider these alternatives:
- Buy after the stock begins trading. If you can't access shares at the IPO price, you can buy in the secondary market, but be aware that price volatility can often last for weeks.
- Consider IPO-focused ETFs or mutual funds. These funds can offer broader exposure to newly public companies than a single IPO, though they still carry market and concentration risk.
- Track IPO calendars without buying right away. Following upcoming IPOs can help you review prospectuses, monitor post-listing performance, and compare options before investing.
- Invest in a broader diversified fund. A broad-market mutual fund or ETF makes it easy to get diversified exposure across companies, sectors, and industries as part of a long-term strategy.
Frequently asked questions about IPOs
Yes. Individual investors may be able to request IPO shares through a brokerage that has access to the offering, but eligibility requirements vary and shares aren't guaranteed.
IPO shares are limited and are often allocated first to institutional investors or eligible clients of underwriting firms. If demand is high, individual investors may receive fewer shares than requested, or none at all.
IPOs can be volatile, and newly public companies may have limited trading history, less public information, and prices influenced by investor excitement rather than long-term fundamentals.
After the IPO is priced, shares begin trading on an exchange in the secondary market. There's no set time trading starts. It often begins within a few hours of the market opening, but it can start later in the day or, in some cases, not at all.
A lock-up period is a set time after an IPO when company insiders and certain early investors are restricted from selling their shares. Lock-ups are commonly used to help prevent a large number of shares from entering the market at once.
Yes. IPO shares can fall below the offering price or the price you paid in the market, especially if investor demand fades, company results disappoint, or broader market conditions change. Keep in mind that all investing is subject to risk, and past performance doesn't indicate future performance.
The IPO price is the price set before trading begins for investors who receive an allocation. The market price is the price investors pay once the stock trades publicly, and it can be higher or lower than the IPO price.