How to Invest in an IPO

by T.J. Black, Demand Media

    Investment savvy individuals may have heard that initial public offerings (IPOs) are the next big thing for investing. This type of investment opportunity gets hyped up because it's something that individual traders may not have access to for investing. This can reduce competition. It also gives investors the first opportunity to invest with a company beginning to trade on the public market. While this is a valid investment option, IPOs have a higher risk than other forms of investing, according to MSN Money.

    Step 1

    Find companies about to list IPOs. You can work with an investment company or search for opportunities on your own. To find your own opportunities, take advantage of online resources, such as the U.S. Securities and Exchange Commission's (SEC's) FreeEDGAR.com or MSN Money's IPO Center. These websites offer news and information about upcoming IPO opportunities. You can find out what companies are about to file Form S1 with the SEC. Alternatively, you can find companies that have already filed and are waiting the 25-day period before open trading.

    Step 2

    Review the preliminary prospectus for companies planning to enter the stock market exchange. The SEC requires all businesses wanting to go public to file a prospectus for investors. According to the SEC, this document must contain information about the financial situation of the business, its operations and its management.

    Step 3

    Consider the risk factors for an IPO. All businesses have to include a risk factor section in the prospectus. MSN Money reports that all prospectuses must contain this section, and they should be the worst-case scenarios. If what you read scares you, choose a different IPO.

    Step 4

    Evaluate the prospectus and any additional information for the companies about to offer IPOs. The prospectus can give you clues about an investment's potential success or failure. If a large number of original investors are selling stock and the company has declining statistics for margins and revenues and a high debt-to-asset ratio, the business may be going public to try to stay afloat.

    Step 5

    Determine the dilution for an IPO. The dilution portion of a prospectus contains the amount of money the original investors averaged per share. In most cases, the public offering should be above this amount. Otherwise, the business may not have gained in value. The dilution can also indicate the percentage of original investors who will drop out of ownership when the stock goes public, according to the Tuck School of Business at Dartmouth.

    Step 6

    Compare the offering price. You'll need to consider how much you can invest, as well as the rate of return you hope to gain. It may be worthwhile to invest in an IPO with a higher offering price if you believe it'll have better gains than an IPO with a smaller offering price.

    Step 7

    Pick the IPO you want to invest in and buy into it. You have several ways to do this. The first is to find the bank that will be managing the sale. You may be able to buy directly into the IPO through the bank before the initial offering occurs. Another option is using a stockbroker who will invest in the IPO on your behalf. You can also invest through an online service that allows you to buy and sell stocks on your own.

    Warning

    • Investing in IPOs is high risk.

    About the Author

    T.J. Black is a freelance writer and editor with a Bachelor of Arts in English from Abilene Christian University. Black writes and provides copy editing for SEO articles. Her work has appeared on a variety of websites.