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Investing strategies

IPOs: What to know

Educating investors on all things IPO-related.
7 minute read
December 13, 2021
Investing strategies
Online trading
Financial terms

“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 entails and whether the investment is right for your portfolio.

What’s an IPO?

An initial public offering is the process by which a private company first offers new stock shares to the public.

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, 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.


What’s the difference between an IPO and a 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 but raises capital to assist with the future acquisition of another company.


How’s an IPO’s issue date determined?

Once an IPO is approved by the SEC, the company and its underwriters will determine the trade date—although this date is subject to change. Investors can check the latest updates for any given listing on their preferred search engine.

What’s the difference between the primary and secondary markets?

The primary market is where a company sells new securities for the first time, usually in the form of an IPO. The secondary market, also known as the stock market, is where securities are traded by investors after being offered on the primary market.

Note: Vanguard Brokerage Services® doesn’t underwrite these offerings, so you can’t participate in the IPO through your Vanguard Brokerage Account. However, you may place an order for the new security online the morning it’s scheduled to go public, prior to its trading on the secondary market.

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What order type can I place before the IPO trades on the secondary market?

A new security is normally uploaded to the Vanguard website no later than 9 a.m., Eastern time, on the day it’s set to begin trading on the secondary market. At that time, you may only place limit orders since the actual price could be higher or lower than the preindication price. Once the security begins trading on the secondary market, you can then place other order types

Limit order:  an order to buy or sell stock with a restriction on the price (a maximum price to buy, or a minimum price to sell).

Preindication price:  a prediction of what the IPO opening price will be when the security starts actively trading on the secondary market. 


Can I select “good-till-canceled (GTC)” or “day” as my order duration before the security trades on the secondary market?

Yes, both GTC and day orders can be placed before an IPO hits the secondary market. If a GTC order is placed but the IPO doesn’t open for trading on the same day, the GTC order will be canceled at the end of the trading day (4 p.m., Eastern time). Day orders are always canceled at the end of the trading day if they’re not executed before the market closes. 

GTC order:  an order to buy or sell a stock that remains open for 60 days after the business day on which the order was placed or until the order is executed or canceled. If this day falls on a weekend or holiday, the order will be canceled on the next business day before the market opens.

Day order:  an order to buy or sell a stock that will expire automatically at the end of the trading day unless it’s executed or canceled. All orders are day orders unless otherwise specified. 


How can I place an order? 

You can place trades either online or by phone. But keep in mind that when you trade online, you won’t be charged a transaction fee. Placing trades by phone may result in a $25 broker-assisted fee.

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Can I place a market order the morning of an IPO?

No, a market order can’t be placed the morning of an IPO. A limit order is the only order type allowed before an IPO trades on the secondary market. Once the security begins actively trading, then a market order may be placed for the stock. 


What time does an IPO occur and the security begin trading on the secondary market?

There’s no set time a security will begin trading on the secondary market; it varies with each company. Securities often begin trading within a few hours of the market opening, but some may begin trading closer to market close, if at all. You can research IPO updates online.


Can I change my open limit order to a market order once trading begins on the secondary market?

Yes: If the open limit order hasn’t yet executed, you can change it to a market order once trading begins on the secondary market.


How do I adjust the order type for an open order I placed online?

Log in to your Vanguard account, and from the menu, choose My Accounts and then Order status. If there’s a limit order that’s still open, you can adjust the order type, share quantity, or duration by selecting Change, and then resubmit the order. 

Even if investing in new companies isn’t your thing, it’s always helpful to learn more about the various investment choices available to you.

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