How to invest in IPOs: a retail investor's guide to primary markets

When a company 'goes public,' it transitions from private ownership to the public markets through an Initial Public Offering (IPO). Historically, the primary market—where shares are first issued—was accessible only to large institutional investors and high-net-worth individuals. Today, the landscape is shifting. Retail investors can now participate in IPOs, though the process remains more complex than buying shares on the secondary market (like the NYSE or NASDAQ). We outline the mechanics of IPO participation and the risks involved.

The IPO lifecycle: from filing to listing

An IPO begins long before shares appear on your brokerage app. The company hires investment banks (underwriters) to manage the process, file an S-1 registration statement with the SEC (or equivalent local regulator), and set an initial price range.

1. The Roadshow: Underwriters pitch the company to institutional investors to gauge demand.
2. Pricing: Based on demand, the final IPO price is set the night before the stock starts trading.
3. Allocation: Shares are distributed to the underwriters' clients. This is where retail access has historically been blocked.

How retail investors can get 'In' at the IPO price

To buy shares at the IPO price—rather than waiting for them to start trading on the exchange—retail investors must use platforms with specific primary market access.

• Brokerage IPO Desks: Larger traditional brokers like Fidelity, Charles Schwab, and TD Ameritrade have IPO centers. However, they often require a minimum account balance (e.g., $100,000 or $250,000) or a certain level of trading activity to qualify for allocations.
• Fintech Disruptors: Platforms like Robinhood (via its IPO Access feature), SoFi, and Webull have democratized access by partnering with underwriters to reserve a portion of shares specifically for retail users, often with no minimum balance requirements.
• Direct Listings and SPACs: Some companies bypass the traditional IPO via a Direct Listing (like Spotify or Slack) or a Special Purpose Acquisition Company (SPAC). In these cases, there is no 'primary' allocation; everyone buys on the open market from day one.

Key risks and considerations

Investing in an IPO is fundamentally different from buying an established blue-chip stock. The primary risk is the lack of historical public data. While the 'prospectus' provides financial details, the stock has no track record of public market valuation.

• Volatility: IPOs often experience extreme price swings in their first days of trading. The 'IPO pop'—a rapid price increase—is common, but so is a rapid decline if the initial hype fades.
• Lock-up Periods: Insiders and early investors are usually barred from selling their shares for 90 to 180 days after the IPO. When this lock-up expires, a surge of selling pressure can drive the price down.
• Under-allocation: Even if you are 'approved' for an IPO, you may only receive a fraction of the shares you requested if demand is high. This is known as being 'scaled back.'

We advise retail investors to treat IPOs as high-risk allocations. The goal should be to understand the company's long-term fundamentals rather than simply 'flipping' shares for a quick profit on day one.