An initial public offering, or IPO, is a process companies use to distribute stock shares to the public for the first time. It’s how a company "goes public." Companies must register IPO shares with the U.S. Securities and Exchange Commission before they can be sold to the public.
Investors subscribe to an IPO for the number of shares they desire and the price they are willing to pay. Because the demand for shares might exceed the supply, a subscriber might not get all the shares desired, and the price per share might be higher than anticipated. To profit from the IPO, you must sell your shares on the stock market for more than the purchase price.
You can place a sell order with your broker to sell your post-IPO shares, but you should be aware of possible restrictions and risks.
The Selling Process
Quick sellers of post-IPO shares are known as "flippers." Their goal is to make a quick profit, usually selling their shares within a few days of purchase. Your IPO stock shares reside in your brokerage account, and you can sell some or all of them at any time.
The process involves placing a sell order online or over the phone in which you set the price you require and the number of shares to sell. You can place a market order in which you accept the current price or a limit order in which you set a minimum price. You’ll receive a notification from your broker when the shares are sold.
The money from the sale, minus commissions and fees, is placed in your brokerage account. As with all shares held for less than one year, any profits you earn from the stock sale are taxed as ordinary income.
IPO Stock and Price Risk
Share prices of IPO stock can be highly volatile in the first few days following issuance. The underwriters (investment banks and dealers who distribute IPO shares to subscribers) might artificially support the share price for the first few days. Once the support ends, share prices could plummet. The way to reduce this risk is to sell your shares within a day or two of receiving them.
Locked-up Shares and Restrictions
Company founders and early investors own private shares of a company before an IPO. If you own private shares, you need to check with the company to see if you are restricted from selling them immediately after the IPO.
Often, private shares are subject to a "lock-up" period of six months or longer before they can be sold in the public market. A lock-up might also apply to company employees who receive shares in the IPO. You can check with the issuing company’s transfer agent to see if the shares have any restrictions.
Limiting of Trading
The underwriters of an IPO generally discourage share flipping, because it depresses the post-IPO share prices. That’s bad for their future business. To limit flipping, underwriters may refuse to sell IPO shares to customers who have a history of flipping shares. This practice makes it harder for small investors to acquire shares and make quick profits on post-IPO shares.
- What Is the Purpose of an IPO?
- The Advantages of the Small Investor
- How Public Stocks Work
- The Redemption of Shares vs. Purchase of Shares
- How to Liquidate Stocks
- What Does a Reverse Merger Mean for My Stocks?
- What Is a Primary Market & Its Role in Finance?
- Can I Write Off an Investment in an Insolvent Company?