Investing in IPOs: A beginner’s guide to getting started

An IPO, or initial public offering, is the process through which a private company becomes publicly traded by offering its shares to the investing public for the first time. Companies typically pursue an IPO to raise capital, which they can use to fund growth, pay off debt or invest in new initiatives.

Before the IPO, shares are typically held by company founders, employees and early investors. Once the company goes public, those shares — plus new ones — become available to institutional and retail investors alike, and the company is often listed on a stock exchange like the Toronto Stock Exchange (TSX) or the New York Stock Exchange (NYSE).

IPOs often create excitement because they offer the first opportunity for regular investors to buy into a company’s future. In some cases, IPOs have delivered strong returns in a short period — especially for fast-growing tech companies or beloved consumer brands.

That said, for every IPO success story, there are others that struggled after going public. A company’s debut on the stock market doesn’t guarantee good performance, and in fact, some IPOs drop below their offering price soon after launch.

Getting in at the IPO stage isn’t always as simple as placing a regular stock trade. That’s because IPO shares are usually allocated in advance, with large blocks going to institutional investors like mutual funds and pension plans. Some shares are typically set aside for retail investors, but access often comes with a few conditions.

Broker access

Not all investment platforms offer IPO access to individual investors. Full-service brokerages and some online brokers may provide access — but often, only brokers who are hired as underwriters by the issuer or who are part of the selling group can get access to the IPO shares.

Indications of interest

If your brokerage does offer IPO access, you may be asked to submit an “indication of interest,” which lets the firm know how many shares you’d like to buy. This doesn’t guarantee you’ll get them — shares are often in high demand and may be rationed.

Trading after the IPO

If you can’t get shares at the IPO price, you can still buy the stock once it starts trading on the open market. However, prices can move quickly on the first day, so be aware of potential volatility.

While IPOs can be exciting, they also come with risks. Here are a few things to keep in mind.

Limited track record

Because the company is new to the public markets, there’s limited financial history to evaluate. While you can review the company’s IPO prospectus, these documents are lengthy and can be dense for first-time investors.

Volatility

IPOs can be highly volatile, especially in the first few weeks or months after listing. Prices may spike due to hype — or drop sharply if the market sentiment shifts.

Valuation uncertainty

IPOs are priced by underwriters based on demand and comparable companies, but that price may not reflect the company’s true value. Some IPO prices are later seen as overvalued, leading to poor returns.

Lock-up periods 

Early insiders, like company executives or venture capital firms, are often restricted from selling their shares for a few months after the IPO. When that lock-up period ends, increased selling pressure may negatively affect the stock price. 

Economic and sector conditions

Even a well-run company can face headwinds if the economy is slowing or its industry is under pressure. Consider the broader environment and whether it’s a supportive time for a new stock to enter the market.

If you’re thinking about investing in an IPO, here are a few practical tips.

Do your research

Review the prospectus, focusing on the company’s business model, revenue sources, risk factors and competitive position. Look at how the company plans to use the money it raises.

Know your risk tolerance

IPOs may not be the best fit if you prefer steady, predictable returns. Be honest with yourself about how much risk you’re willing to take — and whether you can stomach short-term price swings.

Start small

If you’re new to IPOs, consider investing a small portion of your portfolio rather than going all-in. This lets you participate in the excitement while limiting potential downside.

Consider the long term

While some investors aim to make quick profits, IPOs can also be a way to invest in companies you believe in for the long haul. Think beyond day-one performance and consider whether the company has staying power. 

Diversify

Don’t build your portfolio around a single IPO or sector. A well-diversified mix of investments is still one of the best ways to manage risk over time. 

Investing in IPOs can be a rewarding way to support growing companies and potentially capture early-stage returns — but it’s not without its risks. For beginners, the key is to approach IPOs with curiosity, caution and a long-term perspective.