How to Invest in Stocks at the IPO Stage and Earn - Examples and Profitability
How much you can earn by buying shares in an initial public offering - examples and return on investment for an IPO.
Unlike those stocks that have been on the stock exchanges for a long time, new companies attract much more attention, and their value can change much faster. This may already be the answer to the question of whether it is possible to make money on an IPO - yes, even on an unsuccessful one. Due to strong fluctuations in the rate, stocks can generate significant profits in a short time.
There are so many people willing to invest in shares at the IPO stage (at the first placement of shares on the stock exchange) that there are simply not enough shares for everyone. It is not surprising, because among them you can find not only promising startups, but also large corporations with a streamlined business model.
It is not known if it will ever be possible to buy their shares as cheaply as at an IPO.
To understand how you can make money on an IPO, you need to learn how to choose the time and companies to invest in.
How much can you earn from an IPO - examples
Alibaba was valued at $ 21.7 billion at the time of the IPO. On the first day, the stock rose 38% - a good example of how to make money from an IPO.
Plains GP Holdings on the first day showed an increase from 22 to 58 dollars, and a year later it was worth 228% more than on the opening day.
Japanese telecommunications company Soft Bank initially sold its shares at a symbolic price of $ 13, while the profit on the IPO, which was held in 2018, amounted to 23 and a half billion.
The excitement has arisen because the organization is a major player in the telecommunications market in Japan.
Television advertising has become a significant step towards success. By the way, this was the first such campaign for a private IPO. Most of the shares, namely 90 percent, were acquired by individuals. Currently, the market capitalization of Soft Bank is more than $ 113 billion.
The largest bank in China, the Agricultural Bank of China (ABC), held an IPO back in 2010. According to Reuters, the original share price was $ 414. The trades were conducted on the Hong Kong Stock Exchange. Earnings on the initial placement of securities - 19.3 billion.
The Swedish company Spotify made an IPO in 2018, which allowed its founders to raise $ 9.2 billion, although they said they did not plan to raise capital through the stock listing.
In the first few weeks after the initiation of the sale of shares, their value fluctuated in the range of $ 150 - $ 160. The figures looked pessimistic, and all because initially potential investors were in no hurry to invest, because were unsure about the robustness of Spotify's business model.
The management focused on the growth of the number of subscribers and the increase in profits. The expectations were justified: the number of followers really increased to 96 million people, and the revenue reached $ 5.259 billion.
The job search portal HeadHunter did not stay away from the current trend of the last decade and placed its shares on the NASDAQ stock exchange. The result was unexpected for many skeptics. In a short time, the founders of the platform earned $ 220 million, when, as a whole, the campaign was valued at $ 675 million.
Earlier, Mail.ru Group owned HeadHunter - acquired the asset from the founders - but sold it in 2016. And, as it turned out, in vain: after two years, the service's income reached 6 billion rubles.
How to buy shares at the IPO stage
Buy shares on IPO
At the initial public offering on the stock exchange, purchase orders from investors are registered. In this case, the shares are not yet on the exchange and pre-orders are being formed at the starting low price. Many investment funds reserve large shares, so the number of shares for individuals remains limited.
For example, you can apply to buy 170 shares, but upon distribution, you will only receive 110-130 securities.
Since shares are bought conditionally until they enter the market at discounted prices, there is a lockup rule (LockUp) in order to protect the market from manipulation (instant sale of shares at a high price, which will entail a fall in price). Lockup is a term that limits you from selling. In simple terms, you cannot sell shares during a lockup. This is usually 45-90 days from the date of the IPO.
Successful companies that are listed on the stock exchange grow in value during this time. Thus, you buy cheap stocks at a discount and make money on their growth.
How to make money on an IPO - Step by step instructions
The fastest and easiest way for an ordinary investor to make money on an IPO is to apply for the purchase of shares during the IPO through a broker.
For example , we have long been working with the broker Just2Trade (the European branch of FINAM ), which allows you to invest without the status of a qualified investor (CI), which is necessary for investing in foreign exchange-traded assets.
By law, the status can be obtained, but for this you need to have 6 million rubles . This was done to protect the domestic stock market.
You can bypass the mandatory presence of the CI status by investing through a foreign broker, for this FINAM bought out a well-known American brokerage company and transferred it to Europe to work with Russian investors. Just2Trade is regulated by CySEC and is a very reliable intermediary.
You can view the companies next to IPO in your personal account, where you can immediately submit applications:
To buy shares at the IPO stage, you will need to open an MT5 Global account . You need to transfer funds to it, and then apply for participation in the IPO.
The minimum investment is from $ 1000 or with x2 leverage, only $ 500 is enough.
The lockup period is only 30 days.
Sale during the lockup period is possible with a commission of 1.75%.
IPO calendar and selection of companies for investment :
At Just2Trade, for each company there is a detailed document of 70-120 pages, where all the company's reporting, business project and data are indicated.
Other opportunities to make money on IPO
The steps outlined above are not the only option to capitalize on an IPO. There are more ways how to make money on an IPO.
Purchase at the premarket . This is the time before the start of trading, when the stock exchange counts the number of applications from institutional investors - hedge, venture and investment funds. You can get to the premarket only with huge amounts of money, which amount to millions of dollars. At the premarket, the price may be 2-6% lower, but this does not exclude the option of a price drop after the opening of trading.
Private Market on NASDAQ . This is a premarket option, but more affordable. Through him, some of the funds that have already purchased shares at the premarket distribute them to private investors. Of course, with a surcharge, but cheaper than they will cost when buying at the next stages. You need to invest less, but still quite large sums: we are talking at least a few thousand dollars.
Purchase immediately after entering open trading . It's just buying stocks when you open trading on the exchange. The price here is market price, without discounts and changes every second. But no lockup. Some speculators manage to resell shares of a company that has just appeared on the market many times and get huge profits in just a few days.
Invest in different IPOs
More often than not, investors leave a relatively small portion of their funds for IPOs for trading. The main resources are directed to less risky deals. But this does not mean that all money intended for investing in an IPO can be invested in only one company, even if there is great faith in it. Nothing is guaranteed in this market, so it is worth diversifying investments, that is, dividing them into several IPOs.
Leave a reserve
Patience is one of the keys to success. While part of the money is invested and unavailable, the other must be saved in case a very promising project comes across. Don't invest in IPOs that you doubt - only invest in the best.
Conduct a thorough check
Everyone strives to approach the IPO in full dress and with excellent reporting, but over time, the truth comes out. Sometimes after this, the course cannot recover for years. In order not to receive such unpleasant surprises, you need to know in advance as much as possible about the company in which you are going to invest.
FAQ - questions and answers
Who are underwriters?
Underwriters are intermediaries between an IPO company and investors. They are the ones who carry out the training, it depends on them how much funds will be raised and what attitude will develop towards the company. By the underwriters, one can judge the prospects for an IPO, because the best of them take on only the most promising projects. On the other hand, if underwriting is weak, investors may simply not notice another newcomer to the market, even if he has potential - as a result, it becomes much more difficult to realize this potential. In some cases, the underwriter buys back shares from the very beginning and then sells them to investors; in others, it only assists the issuer.
What stages is the IPO divided into?
Preliminary stage, main and listing itself.
At the first stage, underwriters are hired to prepare the company for going public. All documents are put in order, it is checked that the activities of the company do not violate any standards. A business plan is being drawn up or refined, in some cases, part of the assets are sold or liquidated. After all this, its market value is estimated.
During the main stage, active work is carried out with potential investors. The media write about the company, its management holds meetings (road shows) with explanations in which direction it is planned to develop further. Those interested in investing submit applications, the prices at which the shares will be distributed are set. Documents regarding the initial value of the shares are sent for verification to the regulator. After passing through it, you can conclude agreements with stock exchanges on the placement of shares.
The listing ends the IPO process, and the free circulation of securities begins on the stock exchange. The success of an IPO depends not only on how much funds were collected during its course, but also on the subsequent stock price - they should not collapse in the first days of trading, as well as after the end of the lockup period.
Attract capital that will help you develop more actively; increase the value of the company, which will allow founders and early investors to cover their investments and earn money; have control over the company to the main shareholders.
Investing in an IPO is a very attractive opportunity to make big profits in a relatively short period of time. 30-70% profit per year are quite real figures for such investments, and sometimes they are several times higher.
Of course, profit comes with risk, so you need to carefully prepare for each transaction and understand well the real potential of the company entering the IPO.