Investing in IPOs: What It Means and How To Do It

Investing in a company before it goes public can rapidly grow your portfolio. 

For example, when Amazon went public in 1997, the price per share was $18. If you had purchased just 100 shares of Amazon stock back then (a $1,800 investment), it would be worth $4.6 million today.

This is why investors like to get in on companies early. An initial public offering (IPO) is a way to get in on a company before it takes off. 

While the rewards for IPOs can be high, these types of investments often come with greater risks. For every Amazon, there are dozens of companies that flop. 

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What Is an IPO?

Not all companies sell shares of their stock to the general public, but many do. When a company is ready to do so, it “goes public” through an initial public offering (IPO) of its stock. 

This process changes the company’s ownership structure, allowing individual investors to become shareholders within the company.

IPOs are listed on public stock exchanges like Nasdaq or the New York Stock Exchange. This makes shares of the company’s stock available for you to purchase through a brokerage firm. 

Once a company’s stock is publicly available, you can trade the stock. This affects its share price, which reflects the company’s performance and overall outlook.

How to find IPOs

To find a list of companies planning to IPO, check the Nasdaq or NYSE websites. 

To verify whether a company is planning an IPO, you can check for their Form S-1 registration on the Securities and Exchange Commission’s website. 

For companies you’re particularly interested in, follow them on social media to get up-to-date information on their IPO timeline.

How To Invest in an IPO

Unlike shares in established companies like Disney or Coca-Cola, IPOs in new companies can be difficult to access. 

Some IPOs are limited to early investors, while others are open to existing customers or specific stakeholders. 

For example, when Reddit went public in 2024, a portion of the company’s stock was reserved for moderators as a way to thank them for contributing to the platform’s success.

Check the eligibility requirements

Before you purchase an IPO, make sure you meet all of the requirements. If you’re eligible, you’ll also need an account at a broker offering the IPO for the company you’re planning on investing in. 

Keep in mind that brokerages may have their own criteria that you’ll have to meet on top of the company’s criteria. For example, Fidelity requires you to have $100,000 to $500,000 in household assets. 

Several online brokers have much easier requirements. Webull, for example, only requires you to have at least $100 settled cash in your account to buy IPO shares.

Request access

Think of IPOs like trying to get tickets to Taylor Swift’s Eras Tour.

Similar to how a concert venue can only offer so many tickets, there is a limited amount of shares available for purchase during an IPO. And certain investors have preferential access first.

Once you know you're eligible, you’ll need to request access to the shares being offered. 

Place a conditional order

Companies going through an IPO will provide a price range rather than a specific price for what they expect to go public at. 

This allows you to request a number of shares at a price within the range, but the trade won’t finalize until the IPO becomes active.

With IPOs, regular investors typically don’t get early access to floor-level share prices. Large investment banks, angel investors, and other institutional investors get the first shares. Investment banks can then resell their shares to their customers. 

That means retail investors will likely get access after the IPO is active and may not get the best price per share. This can be risky because IPOs fluctuate dramatically during the first hours and days of trading. 

READ MORE: Active vs. Passive Investing: Which Is Best?

Risks of Investing in IPOs

Investing in IPOs can be thrilling, especially if you have a knack for finding unicorns. 

That said, IPOs don’t have a proven track record when it comes to long-term performance. There are some risks you should consider before investing in IPOs.

IPOs may underperform or totally flop

Not all IPOs will become the next Amazon. The short-term gains from an IPO can be enticing but those gains don’t typically hold for the long term. 

Once the IPO launches and the market has time to regulate the price, it usually settles. 

This means an IPO could wind up being worth far less than you originally purchased it for, resulting in a loss.

Not knowing what you’re getting into

Just because an IPO is all the talk on social media doesn’t mean it’s a good investment. Relying on media coverage of a high-profile IPO without doing your due diligence can lead to losses. 

Research a company before investing in it. Doing so can help you determine whether it has a profitable business model and will be able to generate a return for you down the road.

READ MORE: What To Look for When Buying Stocks

Going all in on hyped IPOs

The key to mitigating risk for any investment is to have the right balance. You don’t want to have all your eggs in one basket. 

While Amazon’s performance since its IPO has wildly surpassed all expectations, investing exclusively in Amazon during the late 1990s would have been a high-risk bet. 

IPOs can be part of your overall investment strategy, but if you don’t diversify your portfolio, IPOs can expose you to tremendous risks.

READ MORE: How To Tell If an Investment Is Too Good To Be True

FAQs

Where do you find IPOs?

To find an IPO, keep track of companies planning to go public on Nasdaq and the New York Stock Exchange. 

You can follow companies on social media or track IPOs on sites like Google News or Yahoo! Finance.

How much money do you need to invest in an IPO?

Each brokerage will have its own requirements. 

At Fidelity, for example, you’ll need between $100,000 and $500,000 in household assets, while customers with Robinhood do not need a minimum to be eligible for IPO access.

When can you sell IPO shares?

During an IPO, there is a period called the lock-up period where sales are restricted. This can last anywhere from 90 to 180 days. 

It’s intended to prevent anyone who benefited from insider knowledge of the IPO from unloading their stock onto the market, reducing the price. 

After the lock-up period, trading IPO shares is unrestricted.

TL;DR: Should You Invest in an IPO?

While you can technically invest in an IPO, it isn’t the best option. You likely won’t have access to the best share price, which means you’ll have to purchase your shares from a large investment bank at an after-market rate. 

While you may come out ahead, there is the risk that the share price could fall once it goes public.

The better option is to invest in a mutual fund or an exchange-traded fund (ETF) that includes IPOs in their portfolio. 

There are some funds, like the Renaissance IPO ETF, that invest in IPOs specifically. 

By investing in a fund, you’ll still get access to the gains offered by an IPO, but your risk will be distributed across other companies or sectors included in the fund. 

For more investing insights, check out these episodes of the Erika Taught Me podcast:

• How To Invest for Beginners (Step by Step)
• Investing Advice from the Most Powerful Woman on Wall Street
• Money & Investing Pitfalls to Avoid

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